Evervones Guide

to Financial
Planning
WINN
(When If Not Now)
This book is tax deductible.
Evervones Guide
to Financial
Planning
WINN
(When If Not Now)
bv Helen P. Rogers
Illustrated bv David Aguero
WELLINGTON PUBLICATIONS
CARMEL. CALIFORNIA
First Edition
Copyright 1984 by Wellington Publications
All rights reserved. No part of this book mav be
reproduced or utilized in anv form or bv anv
means. electronic or mechanical. including
photocopving. recording or bv anv information
storage and retrieval svstem. without permission
in writing from the publisher. Inquiries should be
addressed to. Wellington Publications. P.O. Box
223159. Carmel. California 93923
Library oI Congress Catalog Card No.: 83-51159
ISBN: 0-915915-00-6
Printed by Harlo Press/50 Victor/Detroit. Michigan 48203
TO THE HONOR OF HILLEL
c 60 B.C.A.D. 10
who said.
"II I am not Ior myselI then who is Ior me?
II I am only Ior myselI what good am I?
II not now. when?"
Because laws. economic conditions. insurance products and
available investments continually change. the author has throughout
this book urged the reader to accept nothing without Iurther in-
vestigation on his own. It would be Ioolish and could be costly to im-
plement a plan without Iirst seeking proIessional advice.
The inIormation presented is believed to be correct and current at
the time oI this writing. The ideas presented do not pretend to be
original with the author but are grateIully acknowledged as stem-
ming Irom many oI the books recommended throughout. colleagues.
associates and most oI all over Iorty-Iive years oI experiences.
Contents
SECTION ONE-SELF ANALYSIS
1. W I N NWHEN. IF NOT NOW?......................................... 19
Planning . . . Purpose of This Book . . . Professionals
2. GOALS.................................................................................... 23
Hvpothetical Jon .. . Realistic Dreams . . . Where Are You
Headed? . . . Review Plans Periodicallv . . . Mnemonics Ex-
plained . .. Worksheet . . . Reading List
SECTION TWORISK MANAGEMENT
3. CHOOSING INSURANCE...................................................... 33
Four Choices. Accept-Avoid-ReduceTransfer . . . Your
Present Policies . . . Choosing Your Agent . . . What Risks to
Insure Against and for How Much . . . Summarv . . . Work-
sheet . .. Reading List
7
4- HEALTHMSURANCE 41
One ProposalMedical Surcharge .. . Basic Medical
Coverage ... Maior Medical Coverage ... Mr. Painean
Illustration .. . Stop-Loss Provision .. . Comprehensive
Coverage and Excess Medical ... Medicare and Workers
Compensation ... Group Insurance ... Renewal Provisions
... Summarv ... Worksheet ... Reading List
5. UNEMPLOYMENT INSURANCE.......................................... 49
Government Controlled Unemplovment Insurance ...
California As an Example ... The Best Insurance Against
Unemplovment .. . Choosing Your Emplover .. . Your
Overlooked Resources ... Familv As an Emergencv Asset
.. . Wavs to Acquire Skills Necessarv to Insure Against
Unemplovment .. . Summarv ... Worksheet .. . Reading
List
6. DISABILITY INSURANCE..................................................... 59
What Is Disabilitv ... Kinds of Insurers .. . When Do
Benefits Begin and End ... Common Provisions .. . Who Is
Eligible for Coverage . . . Benefits . . . Hvpothetical Mr.
Paine ... Summarv ... Worksheet . . . Reading List
7. DEATH PREMATURELY-LIFE INSURANCE...................... 69
Estate Substitute-Estate Builder-Estate Liquiditv . . . Kinds
of Life Insurance. Term-Whole Life-Endowment-Group
Policies-Government Sponsored . . . Common Rider for
Young Families . . . Dividends .. . What Happens When You
Stop Making Premiums . . . Your Whole Life Policv As a
Financial Tool.. . Grace and Reinstatement Periods ... Col-
8
lateral ... How Much Life Insurance Should You Purchase
. .. Designating Beneficiaries Can Be Trickv . .. Insurance
Proceeds .. . Summarv .. . Worksheet ... Reading List
8. LIABILITY AND PROPERTY INSURANCE.......................... 83
Discover Your Risks ... Relegate Risks Jia Cost-Benefit
Analvsis ... Homeowners Policies ... Caveat... Automo-
bile Insurance ... Deductibles ... Umbrella Contracts or
Excess Liabilitv Policies . .. Summarv . .. Worksheet . ..
Reading List
SECTION THREECAPITAL ACCUMULATION
9. MEET SYDL P. TACCFL........................................................ 93
Securitv. How Secure Is This Investment? ... Yield. Or Rate
of Return ... Diversification. How Important Is it? ... Li-
quiditv ... Protection from Creditors ... Tax Implications
... Amount Needed ... Collateral ... Callabilitv . ..
Freedom from Worrv ... Legalitv ... Worksheet .. .
Reading List
10. COMMON STOCKS................................................................107
How to Determine the Worth of a Particular Stock ... Stock
Split ... Kinds of Common Stock. Speculative-Growth-
Conservative Stock-Cvclical and Defensive Stock-Overlap
. .. How to Buv Stock. Dollar Cost Averaging-Emplovee
Savings Plans-Investment Clubs-Investment Counselors
and Brokerage Houses ... When to Sell ... Individual In-
vestors Incentive Act .. . Summarv ... Worksheet ...
Reading List
9
11. BONDS 121
Contrasted with Stock . .. Yield .. . Bond Ratings . .. Call
Provisions . . . Distinguishing Between Bearer and
Registered Bonds . .. How to Buv Bonds ... Kinds of
Bonds. Corporate Bonds-Municipal Bonds-Government
Bonds . . . Other Government Securities . . . Summarv .. .
Worksheet . . . Reading List
12. MUTUALFUNDS ...................................................................131
Historv . .. Popularitv . . . Kinds of Mutual Funds. Open
and Closed End Funds-Stock Funds-Bond Funds-Balanced
Funds-Municipal Bond Funds-Tax-Managed Funds-Spe-
cialized Funds-Dual-Purpose Funds-Letter Stock and Hedge
Funds-Jenture Capital Funds . . . Familv of Funds . . . Your
Goals Compared to the Obiectives of the Mutual Fund . . .
When Should You Invest . . . Safeguards . . . Summarv . . .
Worksheet . . . Reading List
13. REALESTATE ........................................................................141
The Negatives of Real Estate Investment. Illiquiditv-
Cvclical-Jacancv-Governmental and Political Meddling-
Obsolescence .. . Positive Aspects of Real Estate In-
vestments. Appreciation-Cash Flow-Tax Benefits-Lever-
age . .. Kinds of Real Estate Investments. Single Familv Resi-
dence-Single Familv Fixer-Uppers-Residential Income
Propertv-Development-Commercial Real Estate-Limited
Partnerships ... Summarv .. . Worksheet .. . Reading List
14. UTILITARIAN INVESTMENTS.............................................155
Coins . . . Stamps . . . Diamonds . . . Paintings. Prints and
Photographv .. . Oriental Rugs .. . Antique Furniture ...
10
Gold. Silver. Platinum ... Movies and the Theatre .. .
Summarv . .. Worksheet . .. Reading List
SECTION FOUR-RETIREMENT
15. WHAT IS RETIREMENT?......................................................169
Never Too Earlv to Prepare . . . Compounding Interest . ..
Inflation . .. Uncertaintv Calls for Short-Term Investment
Strategies . . . What Does Retirement Mean to You? . . . The
Best Thing to Save for Your Old Age Is Yourself . .. Free Ad-
vice Can Be Expensive .. . Summarv . . . Worksheet . ..
Reading List
16. WHAT IS AVAILABLE? ........................................................181
Pension Plans . . . Jesting . . . Disabilitv . . . Three Basic
Tvpes .. . Profit Sharing Plans . . . Stock Purchase Plans .. .
SERPs . .. ESOPs . .. TSAs . . . Thrift or Savings Plans . ..
SEPs . . . Salarv Reduction Plans .. . Keoghs ... IRAs . . .
Municipal and Other Tax-Exempt Bonds . . . Summarv . . .
Worksheet .. . Reading List
17. HOW TO TAKE BENEFITS....................................................199
Single Life Annuitv . . . Joint and One-Half Survivor Annui-
tv .. . How DistributedLump-Sum .. . Annuitv Distribu-
tion .. . Pros and Cons of Annuities . .. When Does
Distribution Take Place? . .. Summarv . . . Worksheet .. .
Reading List
18. OLDER ACHIEVERS..............................................................209
Inspiration from the 1980sJoel Hildebrand .. . Edith
Truesdell . . . Ansel Adams . . . Estelle Winwood . . . Helen
11
Haves ... James Michener .. . Arthur Murrav .. . Appv
Kroll .. . Grace Murrav Hopper . . . Ruth Rockfarb ...
Clarence Ross . . . Sam Ervin . . . Inspirations from Historv
. . . Worksheet .. . Reading List
SECTION FIVETAX MANAGEMENT
. "S I R"SOCIAL SECURITY.
INCOME & REAL ESTATE TAXES.......................................221
Income Defined . .. Gross Income . .. Deductions. Exclu-
sions and Credits .. . Business Deductions .. . Personal Liv-
ing Deductions .. . Exemption . .. Jat Iss Income Tax? .. .
Social Securitv .. . Real Estate Taxes. State and Local-
California As an Example . .. Worksheet . .. Reading List
. "PEA R"-POSTPONE. ELIMINATE.
ACCEPT&REDUCE...............................................................235
Postponement. Capital Gains and Losses-Real EstateSale
of Residence-Equitv Investments-Exchanges-Retirement
Plans ... Elimination. Real EstateOnce-in-a-Lifetime Op-
portunitv-Gifts-Clifford Trusts-Unitrusts-Crown Loan-
Municipal Tax-Free Bonds-Dividends and All Savers Cer-
tificates ... Acceptance ... Reduction. Real Estate Deduc-
tions-The "At Risk Rule"-Deductible Contributions to
Retirement Plans-Tax Shelters-Home Office Deductions
... Credits .. . ERTAAlternative Minimum Tax etc. ...
Summarv .. . Worksheet . .. Reading List
. "SOUNDINGOFF" ..................................................................253
Progressive or Graduated Tax . .. A Little Historv ... Free
Enterprise vs. Socialism ... Corporate Taxes ... Capital
12
Gains ... Indexing ... Tax Reform. Flat Rate-Consump-
tion or Expenditure Tax ... Goals ... Limiting Government
Spending .. . Whos to Blame? .. . Worksheet . .. Reading
List
SECTION SIXESTATE PLANNING
22. OBJECTIVES..........................................................................277
Fat Ed the Hopping CopThree Kinds of Estates . .. Reduc-
ing the Cost of Estate Administration .. . Choosing the Ex-
ecutor .. . Determining Heirs . .. The Role of Insurance . ..
Providing Liquiditv . . . Business Considerations ...
Transfer or Distribution of Propertv . . . Summarv . ..
Worksheet
23. METHODS OF ESTATE TRANSFER....................................289
Forms of Propertv Ownership . .. Gifts . . . Beneficiarv Ar-
rangements .. . Life Insurance Proceeds ... Buv-Sell
Agreements ... Powers of Appointment . .. Trusts . ..
Wills ... Intestacv ... Reasons to Avoid Intestate Distribu-
tion .. . Summarv ... Worksheet ... Reading List
GENERAL RECOMMENDED BOOKS.................................307
INDEX.....................................................................................309
MNEMONICS
HUDDL Section Two ......................................................... 30
SYDL P. TACCFL MEETS BUMERS - Section Three . 90
WW HO SectionFour...........................................................166
SIR PEAR SectionFive........................................................218
FAT ED THE HOPPING COP - Section Six.........................274
13
Preface
I took liberties with the last line oI a Iamous quotation attributed
to Hillel (60 B.C. A.D. 10) and used it Ior the title oI this book:
"When. II Not Now?"
The entire quotation reads:
"II I am not Ior myselI then who is Ior me?
II I am only Ior myselI what good am I?
II not now. when?"
The second line gave me the motivation necessary to write this book.
The third line is meant to give vou motivation to do something about
your liIe.
Many people Ieel they cannot aIIord proIessional advice when it
comes to planning Ior their productive and Iinancial Iuture. In reality
they cannot aIIord to be without this advice!
What can advice do Ior me? How much will it cost (or beneIit me
in terms oI savings)? How do I choose an adviser? The answers to
these and other questions are Iound in this book.
This is as close as one can get to a "do it yourselI" book in a Iield
that does not easily lend itselI to the selI-help concept. The purpose
oI this book is to educate you to the Iact that you can beneIit Irom
proIessional advice and to show you that such advice should save
rather than cost you in terms oI time and dollars.
15
However. it is up to you to choose your advisers wisely and to
monitor their counsel. Rare is the person who has not suIIered at one
time or another at the hands oI an incompetent proIessional whether
he be plumber. mechanic. investment adviser or doctor. The in-
competence oI an attorney dramatically changed ten years oI my
liIein response I studied law. I don't suggest you pursue surgery as
a career iI you have been the victim oI an unnecessary operation. but
study you must. Gather inIormation and compare opinions beIore
making the decisions that are ultimately yours alone to make. To
purchase stock solely on the recommendation oI your broker is
Ioolish. Listen. get other opinions and cheek out the recommended
company. This book and others will tell you the many things you
must take into consideration beIore choosing the insurance. savings.
investment. retirement and estate plan that is best Ior you.
Remember. advice in the area oI Iinancial planning must always be
taken as a whole. not piecemeal. and in the light oI your unique cir-
cumstances.
The purpose oI this book is to educate not indoctrinate. The only
point oI view I wish to advocate is the need Ior critical analysis. No
one has your interests more at heart than you do! No one knows
your situation. your hopes. desires and needs as well as you. In the
long run you and no one else is responsible Ior the satisIaction or
disappointments you get out oI liIe. You can respond to events
haphazardly as they work on you or you can. through advanced
planning. anticipate and control events rather than always being
controlled by them.
Isn't it time you took charge oI your liIe? WINN
WHEN. IF NOT NOW?
16
SECTION ONE
ANALYSI
S
1
WINN
When. If Not Now?
Planning is one oI those things everyone knows he should do but
usually puts oII until a more opportune time.
Living without a plan is like driIting in a boat. You may. with the
proper attitude. have a marvelous time and even eventually reach
the destination you had in the back oI your mind all the time. but
that happens only rarely. Shakespeare put it this way: "Fortune
brings in some boats that are not steered." More oIten the driIter en-
counters storms Ior which he is not adequately prepared and may
crack up on unseen rocks. Even iI he manages to survive he may Iind
he has had to put in at a port Iar diIIerent than the one he would have
chosen. Even the lucky ones who seem to do all right without charts
and maps to guide them. could have reached their destination and
gone on to even more Iascinating places with a little planning and
discipline.
A lot has been said lately about Iinancial planning; a relatively
Iledgling proIession in its own right. Much oI what the new Iinancial
planner does was Iormerly the exclusive province oI the insurance
salesman. the investment adviser and estate planning attorney. Un-
Iortunately "estate" is a word which coniures up images in most peo-
ple's minds either oI the holdings oI millionairesespecially groom-
ed gardens and iron gatesor is associated with death. Financial
planning brings to mind counsel Ior the person with money; so much
19
that he needs help in deciding where it should be placed. The average
man lets his creditors dictate where his money should go. So much to
the landlord or mortgage. so much Ior groceries. clothing. doctors.
etc. He has no need Ior planning Ior surplus. He is exactly the person
who can beneIit most Irom Iinancial planning I I Iind it unIortunate
that this proIession has come to be known as estate and Iinancial
planning because that title tends to scare away the people who most
need such services. Perhaps it should be designated the "Goal Im-
plementation" proIession; the art oI helping a person establish and
achieve his goals in liIe. Whatever your present position and age you
can set and accomplish your goals with proper planning and
discipline.
The Iact that you are reading this book shows you have decided
to stop procrastinating. delaying. and have answered Hillel's ancient
question. "II not now. when?" with "NOW!"
This book will do diIIerent things Ior each reader but I guarantee
it will be worth Iar more to you than the price you paid. II you
IaithIully pursue the worksheets provided at the end oI each chapter
you will have a better understanding oI your present position in
terms oI what you really want out oI liIe; what assets you have to
work with and inIormation Irom which to evaluate your strength
and weaknesses. Most oI you will need proIessional help in more
than one area in Iorming a plan to get Irom your present position to
where you hope to be. II you have Iilled in the Iorms. given careIul
consideration to the questions and diligently gathered the inIorma-
tion required. the cost oI proIessional services (attorney. Iinancial
planner. accountant. etc.) should be considerably reduced. You will
have anticipated the proIessional's need to gather data and thereby
made the iob easier Ior him and less expensive Ior yourselI.
A minority oI you may want to invest the time required to imple-
ment a plan on your own. The books recommended at the end oI
each chapter are Ior you. However. even though it may sound like a
"cop-out". iI your assets are vast and goals complicated I would
agree with colleagues that you should deIinitely obtain proIessional
counsel. On the other hand. I have stressed throughout this book
that it is the person with the small estate who can beneIit most Irom
proIessional help. The Iewer the assets the more important each
20
becomes. There is no room Ior waste due to unIamiliarity with tax
codes. investment procedures or trust provisions. Trying to handle
your Iinancial and estate planning totally on your own is a perIect
example oI being "penny wise and pound Ioolish"! It's iust not that
easy!
But wait! Don't throw this book away and rush out to the nearest
attorney. accountant or Iinancial planner. It's not that easy either 1!
In Iact what prompted me to write this book is the Iact that so many
people seem to be extremely docile with their lives and savings. Talk
shows on radio and television. magazines. newspapers. seminars.
advertisingalmost everywhere a person turns someone is telling
them "How to ... " "How To" books are the easiest to sell nowadays
and you're right. that's exactly what this book purports to be; a
"How to Think for Yourself" book because there is no other way to
succeed. I have heard. along with you. all the gurus contradicting
one another in a constant stream; "Buy gold/Sell gold." "Get out oI
the stock market /Hang in there." "Buy term insurance/Buy whole
liIe." "Probate is bad/Probate is good." Who can you believe; who
should you Iollow?
The important thing to remember is that no one knows every-
thing; even in his own Iield. Among doctors an eye. nose and throat
man might not be up on the latest treatment Ior high blood pressure.
A criminal lawyer may have little knowledge oI the latest changes in
tax law. Even narrowed down. iI you consult an ophthalmologist
with your eye problem he certainly will not know everything there is
to know about eyes. He will have a knowledgeable opinion; a iudg-
ment.
Do you then have to become an expert to recognize one?
Remember that old kid's saying. "It takes one to know one!"? Well.
that is the ideal and as impractical. impossible and ridiculous as it
sounds. I am nevertheless advocating an approximation oI it. You
must be willing to research a subiect enough to know the questions to
ask. the suggestions to make and have enough conIidence in your
own intelligence to evaluate arguments set Iorth on both sides. I deIy
you to think oI an issue about which no one holds an opposing opi-
nion! Do not be led blindly by last week's magazine article or this
21
week's talk show guest. Check it out! In my experience the more dog-
matic the individual the less intelligent and probably less inIormed.
II you want to take charge oI your own liIe then you have some
work ahead oI you. You may even have to replace some television
time with reading Ior nine months or so. but you'll become a more
conIident and selI assured human being.
O.K. thenlet's get on with it!
22
Goals
I Iind people don't think as big as they used to; they no longer try
Ior the brass ring. Perhaps they're more realistic. But how do they
know what is real till they give it a try? Each generation attempts to
Americanize the English language. One oI my Iavorite resulting
phrases is "Go for it'" It's puzzling to me that the generation that
coined that phrase seems less able to Iollow its dictates than earlier
generations. It's hard to ask yourselI what you want out oI liIe when
you start with unnecessary restrictions. What kind oI twenty-three-
year-old would answer the question. "How much money would you
like to be making at age thirty-Iive?" with "$25.000."? Why not a
million? Wouldn't he rather? Yes butbut a lot oI things. They
know no oneno Iamily members or Iriends who are making a
million dollars at age thirty-Iive. They hear oI unemployment. They
hear complaints all around them about the state oI the economy.
They end up doubting themselves and their abilities without giving
themselves a chance.
Do we still want our kids to have more than we did. or are we
contentresigned to the idea that they should and will have the
same or maybe less than we who grew up in the 40s. 50s and 60s?
Many oI our parents were victims oI the depression years so natural-
ly they pushed Ior us to have more and do better.
I don't want to direct this book to any particular age group. The
ideas here will work Ior you whatever your age and circumstances.
The earlier in liIe you learn how to Iorm and implement goals the
23
easier it will be Ior you. Also I'm certainly not saying all twenty-
three-year-olds should have making a million dollars by age thirty-
Iive as their goal I I am expressing amazement that they should
restrict themselves to answering. "$25.000." on the basis oI what
they see and hear around them. "$25.000" may well be the answer I
would encourage a certain young person to come to. but only aIter
taking into consideration data such as in the Iollowing hypothetical:
Jon. age twenty-three does not want to marry until past age
thirty. iI ever. He is a teacher. He likes backpacking and things to
do with nature.
"Hypothetical Jon" has no need Ior a lot oI money. He anticipates no
dependents. enioys a proIession which does not pay well and a non-
working environment which is comparatively inexpensive. Jon. at
this stage oI his liIe. has determined that he values non-material
things more than material. It iust so happens that teaching and
nature-loving complement one another; the proIession providing
both enough time and money to enhance the avocation. But even Jon
has need oI Iurther planning and should read this book Ior inIorma-
tion on insurance. passive investments. retirement planning. etc.
Those oI us beyond age twenty-three may have seen ourselves
when reading about Jonourselves beIore we met our spouse and
had several children! Planning can not be done once in a liIetime.
That's itonce and Ior all I The priorities in our lives change con-
stantly. Our plans should be reviewed whenever an event such as a
marriage. birth. death or career change takes place. and at any rate
no less than once a year.
In Iorming goals oI course. there are constraints. "Go for it'"
means that more is possible than you may let yourselI dream. That is
the lack the maiority oI us have to overcomedaring to dream! And
even then most oI us dare not soar. even in our imaginations. There
is however. the other side which one encounters occasionally. The
Iive Ioot six inch guy who wants to be a basketball star; the 150
pound awkward large boned girl who dreams oI becoming a prima
donna on the ballet circuit; the person with 20/100 vision who
always wanted to be a iet pilot. or even more tragic. the pianist who
loses a hand; the painter who goes blind! One must learn to be
realistic in Iorming goals and may on occasion need some obiective
24
Ieedback. I really believe nothing is impossible iI one wants it badly
enough. but an adiustment in planning may be in order. Vision can
be corrected so one could Ily even though the policies oI the air Iorce
and commercial airlines prevent pursuing those two particular
avenues as a career. Music can still be pursued with one hand;
perhaps in composing. teaching or conducting. Dreams need not be
scrapped when the unexpected intervenes; only a slight shiIt might be
called Ior.
You should make Iriends with yourselI. Get to know yourselI.
Your likes and dislikes; strengths and weaknesses. The questions at
the end oI this chapter are geared to help you do iust that.
I have on occasion addressed the graduating classes at the
DeIense Language Institute in Monterey. CaliIornia. I usually begin
with a short story I heard some time ago. My version Iollows:
In Berlin one day. a man. a detective. Iollows another man.
He loses him; wonders iI he has stopped at a particular hotel. To
Iind out without causing suspicion. he decides that the best way
is to go into the hotel. up to the desk clerk in the lobby and in-
quire iI he himselI (giving his own name oI course) is registered
there. While the clerk looks Ior his name on the register he plans
quickly to scan the list to determine whether the other man he is
pursuing is actually registered at the hotel.
Everything works out according to planat Iirst. He enters
the hotel. crosses the lobby. walks up to the desk and asks the
clerk iI he himselI is registered there. Then he gets the shock oI his
liIe! Quickly. almost without looking at the register. the clerk
says. 'Yes. he is registered here and he is waiting Ior you in Room
1233." Stunned. the man backs away in a daze. Victim oI his own
scheming. he takes an elevator to the twelIth Iloor. and knocks
on the door oI Room 1233. Slowly the door opens. There. stand-
ing beIore him. is a man looking amazingly like himselIa little
grayer; a little heavier with a Iew more lines in his Iacethe man
he will be in about twenty-Iive years' time. I will leave their con-
versation to your imagination.
The point being that Ior each oI you there is a persona
YOU Iive. ten. twenty. twenty-Iive years in the Iuture. When it is
your turn to open that Iuture door twenty-Iive years Irom now
and look squarely in his eyes. how will you like what you see?
I was going to start this chapter with the Iollowing words written
almost 2.000 years ago by the Roman philosopher. Seneca: "Our
plans miscarrv because we have no aim. When a man does not know
25
what harbor he is making for. no wind is the right wind." However.
the more I thought about it the more I realized Seneca is generally but
only partially right. He substantiates the importance oI goals but
Shakespeare realized liIe in the real world does not always work by
cause and eIIect. OIten the bad guys winunIortunate things hap-
pen to good people"Fortune brings in some boats that are not
steered." (Shakespeare)
Sometimes one event leads to another. to another. in an almost
gentle sequence. As iI one must get Irom step #1 to step #7 without
seeming to do so. Somehow. psychologically or physically or
because oI lack oI education or experience. iI step #7 were presented
directly to the person at step #1 it would be turned down Ilatly as a
preposterous. unacceptable idea.
No matter how well you plan you cannot Ioresee all your Iuture
needs and wants. That's why the yearly review is so important. Some
people will inevitably experience more changes than others. You do
the best you can at the stage in which you Iind yourselI. Use honest
and thorough evaluations. and then prepare Ior the unexpectedthe
unIoreseen events which strike Irom time to time in all our lives.
Speaking oI preparing Ior the unexpected brings us to the next
chapter on risk management and the Iirst mnemonic (pronounced with
the Iirst letter silent. "-nemonic" and meaning any memory aid). You
will Iind mnemonics throughout the book. For those oI you who don't
Iind such devices useIul the context oI the book will not suIIer iI you
simply choose to skip the pages which reIer to mnemonics. I constantly
use devices like the ones illustrated and have even written a separate
book detailing their useIulness. II you are like me. a study oI the
mnemonics. usually presented here in the Iorm oI acronyms and visual
aids. should help you retain and recall the inIormation presented.
Keep a separate notebook Ior the inIormation required by the
worksheets Iound at the end oI every chapter. That way you will
have plenty oI room Ior your answers and can keep in one place all
the inIormation you have gathered while reading this book.
26
WORKSHEETCHAPTER TWO
SELF TEST
DO YOU KNOW WHO YOU ARE AND
WHERE YOU ARE GOING?
This test is designed to help you know yourself a little better
and define your goals.
DO NOT GENERALZEBE SPECFC!!
1. My three best character strengths are________________
2. My three worst character traits are
.
3. My three best physical features are__________________
4. My three worst physical features are_________________
5. used to be _____________________________but now
6. am satisfied with my educational achievements________
or would like to pursue________and it will take______years.
7. f could make three changes about my present job,
8. Most people see me as___________________________
9. see myself as_________________________________
10. would be willing to work longer hours if_____________
11. would like to work less because___________
12. don't mind taking direction as evidenced by
13. enjoy taking responsibility as evidenced by
27
14. prefer city to country living or vice versa.
15. prefer office work to physical activity or
16. would like to make________dollars next year, $_______
in five years, $_______10 years, $________20 years.
17. My greatest achievement to date has been
18. Taking risks is_________________________________
19. My feelings about SECURTY in home, marriage, job and
money are_______________________________________
20. f could have 3 wishes which must be spent selfishly
they woud be____________________________________
21. Name the ten public figures (sports, religious, political or
from the entertainment field) you most admire and would like
to spend some time with.
28
RECOMMENDED READING
CHAPTER TWO
Make it a habit to read J2 hour oI motivational material each
day. I recommend anything written by:
Napoleon Hill Erich Fromm
Norman Vincent Peale Leo Buscaglia
Dale Carnegie Og Mandino
J. Paul Getty Success Magazine
The Magic of Thinking Big. by David Schwartz
How to Attract Good Luck. by A.H.Z. Can*
How to Give and Receive Advice. by Gerard Nierenberg
Be the Person You Were Meant to Be. by Jerry Greenwald
Self-Renewal. by John Gardner
Advice from a Failure. by Jo Coudert
Shifting Gears. by Nena & George O'Neill
How to Live 365 Davs a Year. by J.A. Schindler
The Art of Thinking. by Ernest Dimnet
A Guide to Rational Living. by Albert Ellis & Robert Powers
Onlv the Best. by Wallace Hildick
Success Forces. by Joseph Sugarman
The Psvchologv of Self-Esteem. by Nathaniel Branden
Psvchomatics/The Power of Super-Persuasion. by Norvell
The Magic of Thinking Rich. by Ralph Charell
How to Get Rich Slowlv but Almost Surelv. by William T. Morris
29
nsurance
Liability and
Property nsurance
H U D
Disability
Unemployment nsurance
Health nsurance
D L
30 Death
Prematurely
(Life
nsurance)
SECTION TWO
MANAGEMENT

Choosing
Insurance
Believing in "Murphy's Law": "Whatever can possibly go wrong
will." is the Iirst step in determining risk.
A person has Iour choices when dealing with risk:
1. Accept the risk.
2. Avoid the risk.
3. Reduce the risk.
4. TransIer the risk.
ACCEPTING THE RISK
Accepting the risk is oI course the most economical course as it in-
volves doing nothing. That is the way you usually accept risks with
very long odds and against which you Ieel powerless at any rate.
such as nuclear war or chances oI a meteor striking you or your prop-
erty.
AVOIDING THE RISK
You choose to avoid the risk when you sell a property at a discount
with no guarantees ("AS IS"). or a broker decides to have no
33
salesmen because he does not want to be responsible Ior their ac-
tions. or a Iamily decides against keeping a dog because oI the possi-
ble harm it may cause to other people or their property. or one
decides to take public transportation rather than drive to work to
avoid Ireeway accidents.
REDUCING THE RISK
Reducing the risk is synonymous with prudent living. It involves
keeping property in repair. using tools careIully. keeping Iire ex-
tinguishers handy. installing burglar alarms. etc.. etc. Being careIul
and aware oI dangerous situations always reduces risk.
TRANSFERRING RISK
TransIerring risk is the topic oI our discussion. TransIerring risk to a
third party who agrees to take the risk Irom your shoulders in return
Ior the payment oI a certain sum oI money. is what insurance is all
about.
YOU AND YOUR POLICIES
Who reads an insurance policy? II I asked you what your limits oI
coverage are on your medical. health. homeowners or auto in-
surance could you tell me? Most oI you are Iamiliar with your deduc-
tibles. (The amount you yourselI must pay beIore the insurance com-
pany pitches in.) Do you know what your health insurance elimina-
tion period is? (The time between the actual occurrence oI the iniury
and the insurer's coverage actually takes eIIect.) Do you know you
are covered by your own uninsured motorists provision oI your
automobile policy iI you are a victim oI a hit and run accident?
II your attitude is. "I leave that all to my insurance agentwe're
Iriends. he's a good guy and I trust him." you are not alone and par-
don me Ior saying so but you are a Iool!
34
INSURANCE IS YOUR RESPONSIBILITY
It is not my intent to cast dispersion on insurance salesmen. The great
maiority oI them are conscientious. do a good iob and are indeed
your "Iriend." a "good guy" and "honest"; that is not the point. You
are a Iool iI you do not thoroughly investigate something which can
play such a maior role in your liIe plans. As well meaning as your
proIessional may be. he is being pressured Irom several sides by his
need to rise within his company. the economic needs oI his Iamily.
the needs oI many other clients to keep track oI as well as his desire to
give you quality service. As good as he may be no one knows your
particular situation like you do.
HOW DO YOU CHOOSE YOUR AGENT
Choosing an insurance agent is much like choosing your other pro-
Iessionals. such as accountants. doctors. and lawyers. Initial con-
tacts usually come about through reIerrals Irom Iriends or business
associates. Service. conscientiousness and promptness are what you
are looking Ior in an agent. You will also want a person you can Ieel
comIortable with and whose personality is compatible with yours.
Since you will be turning to him in times oI trouble and emergency.
you want a reassuring person who you can trust and conIide in. II
your agent has a designation such as a CLU (Chartered LiIe Under-
writer). CPCU (Chartered Property Casualty Underwriter). or CFP
(CertiIied Financial Planner) it shows a commitment to his proIession
and a better than average degree oI knowledge in his Iield. Although
there are oI course many competent and knowledgeable agents
without any oI these designations it should be noted that these titles
are not given lightly and may take years to achieve by passing ex-
aminations on insurance. taxes and other related Iields.
WHAT RISKS TO INSURE AGAINST
AND FOR HOW MUCH
All risks should not be insured against; it would be too costly. The
risks that could potentially destroy your net worth are the ones to
35
consider Iirst. * It's not how oIten something occurs that one needs to
be concerned about (Ior instance Iender-benders to the automobile)
but how large the damage could conceivably be (million dollar suit
Ior personal iniury payable to the other driver involved in the Iender-
bender) .
A rule oI thumb in determining whether to insure or retain the
responsibility Ior paying potential losses in a given area. is to check
out the relationship the potential claim bears to your Iamily's current
net worth. This would oI course change over time. The larger your
estate becomes the more important it is to have adequate liability
coverage. Courts Irequently award million dollar damages to plain-
tiIIs nowadays.
People with limited incomes must choose their insurance wisely
in order to cover the premiums (cost oI coverage). For example. they
may not be able to aIIord insurance on their house. the other Iellow's
automobile as well as their own and have complete health care
coverage also. Since very oIten such a Iamily's net worth is at-
tributable mainly to their home. they dare not skimp on Iire coverage
so may choose to absorb some medical expenses or damages to their
own automobile. However. they should always make sure damage
to the other Iellow's car will be adequately covered so his attorney
will not come against their home and other assets.
SUMMARY
Risk can be handled by acceptance (use when either threatened
damages or likelihood oI occurrence is slight). avoidance (reIrain
Irom certain actions or control over certain things). reduction
(cultivate careIul habits). or transIerence (the insurance company
assumes your liability Ior a price). It's your responsibility to analyze
your priorities and determine the coverage you need and can aIIord.
It is Ioolish to leave these decisions entirely to your agent's discre-
tion. Insure against losses that could wipe out your net worth rather
* Your net worth consists oI your assets. everything you own- minus
"our liabilities which is all your debt.
36
than against those events that occur Irequently but whose cost you
can absorb without risking everything.
Fill out the Iorm Iollowing this chapter to determine your net
worth. Use a separate notebook so you will have everything in one
place as suggested in Section One. The recommended reading list
Iollows the worksheet.
37
WORKSHEETCHAPTER THREE
FORM TO DETERMINE NET WORTH
AS OF (DATE)
ASSETS
Liquid assets
Cash and checking.........................................____________
Savings Accts.................................................____________
Money Markets..............................................____________
Life ns. Cash Value.......................................____________
U.S. Savings Bonds.......................................____________
Brokerage Accts.............................................____________
Other .............................................................____________
Total liquid assets _____________
Marketable nvested assets
Common stocks ...........................................____________
Mutual Funds.................................................____________
Corporate Bonds............................................____________
Municipal Bonds.............................................____________
Certificates of Deposit....................................____________
Other .............................................................____________
Total Markt, nv. Assets _____________
Nonmarketable nv. Assets
Business nterests ........................................____________
nv. Real Estate..............................................____________
Pension Accts................................................____________
Profit-sharing Accts........................................____________
Thrift Plan Accts.............................................____________
38
RAs...............................................................____________
Preferred Stocks............................................____________
Tax shelters....................................................____________
Other .............................................................____________
Total Nonmrkt. Assets _____________
Use Assets
Residence......................................................____________
Vacation Home..............................................._________
Auto................................................................____________
Boat...............................................................____________
Furs, Jewelry..................................................____________
Furniture .......................................................____________
Other personal prpty......................................____________
Total Use Assets _____________
TOTAL ASSETS _____________
(Use fair market value for "Use Assets")
LABLTES AND NET WORTH
Current Liabilities
Charge Accts& Credit Cards..........................____________
Other bills payable ........................................____________
Short term loans ............................................____________
Outstanding taxes.........................................._________
Total Current Liabilities _____________
Long Term Liabilities
Mortgage on residence..................................____________
Mortgage on investment R.E.........................
......................................................................
Auto loans......................................................
.......................................................................
39
Other Bank Loans..........................,..............____________
Margin Loans.................................................
......................................................................
Life ns. Policy loans......................................____________
Other .............................................................____________
Total Long Term Liabilities
FAMLY N ET WORTH
(Subtract liabilities from assets)
Total liabilities and Net Worth
RECOMMENDED READING
CHAPTER THREE
"Risk & Its Treatment: Changing Societal Consequences." Irom The
Annals. edited by George Reida
The Shoppers Guide Book. by Herbert Denenberg
The Great American Insurance Hoax. by Guarino & Trubo
The Invisible Bankers. by Andrew Tobias
Fundamentals of Insurance. by Robert Mehr
Principles of Insurance. by George Reida
Fundamentals of Risk and Insurance. by Emmett Vaughan
General Insurance. by David Bickelhaupt
Your Insurance Adviser. by Saul Sokol
Risk Management and Insurance. by Williams. Arthur & Heins
The Insurance Forum. by Joseph Belth
Bests Insurance Ratings. by A.M. Best Co.
40
4
Health
Insurance
The subiect oI health care costs is one oI the most controversial
topics in the country today. The Reagan administration. concerned
by the sky-rocketing cost oI health care. has proposed a combination
oI tax increases and limits on payments Ior services. All sorts oI
recommendations have been advocated by a host oI conscientious
citizens and politicians.
The medical surcharge is iust one such proposal. Under this plan.
a recipient oI medical beneIits Irom the government would be ex-
pected to reimburse the government according to his ability as deter-
mined by the amount oI income tax he paid in a given year. The
obligation to repay medical beneIits would carry over Irom one year
to another. II you received help when "down on your luck" when
things got better (as evidenced by your income tax returns) you
would be expected to pay oII what would be considered to be a debt
to the government. II you remain poor enough to pay no income tax
you would never be expected to reimburse the government.
A Presidential Commission on the Study oI Ethical Problems in
Medicine and Biomedical and Behavioral Research. issued a report in
the spring oI 1983 entitled. "Securing Access to Health Care." They
Iound 22 million to 25 million Americans had no health insurance
coverage and that because oI iob changes or other reasons. approx-
imately 34 million were without coverage at some point during a one
41
year period. In this chapter we intend to analyze your individual
coverage and see where you stand in this area.
BASIC MEDICAL COVERAGE
Basic coverage provides Ior hospital expenses. surgical proceedings
and may be written to cover some health services outside the con-
Iines oI the hospital. It was your common. and as the name implies.
"basic coverage" Ior medical expenses until costs in the health Iield
began to soar dramatically aIter the second world war. Because the
maximum beneIits are low and many expenses may not be covered.
the consumer usually Iinds himselI involved in patching several
policies together in order to obtain anywhere near adequate
coverage Ior his Iamily. Because oI these limitations maior medical
type policies are more popular today.
MAJOR MEDICAL COVERAGE
Maior medical policies have high or even unlimited maximum
beneIits which can be applied on a various time oriented basis. Most
types oI medical care expenses are covered up to the policy's limits.
However. maior medical policies have what are called "inside limits"
restricting coverage Ior certain items such as room and board.
surgery and private nursing. to a speciIic pre-determined amount
and no more. That amount is the "inside limit" Ior that particular
policy. Because oI the high maximum coverage these policies pro-
vide. the premiums would be out oI reach Ior most people iI deduc-
tibles and coinsurance provisions were not used. Policies vary but
the consumer is usually required to pay the Iirst $100 or $200 oI
medical expenses (deductible) on either a calendar or beneIit-year
basis (the name is selI-explanatory) or a per cause basis. Per cause
means incident by incident. AIter the deductible is paid. the co-
insurance provision normally provides Ior the insured to pay a
speciIied portion oI the covered expenses. An 80/20 coinsurance
provision would require the insurance company to pay 80 oI those
items covered under a particular policy (N.B. not 80 oI the entire
bill) and the insured to be responsible Ior the remaining 20.
42
The Iollowing illustration may be helpIul:
MR. PAINE
Mr. Paine has a maior medical coverage with a $100.000 policy limit
(on a calendar-year basis) with a $100 deductible (on a per cause
basis). an 80/20 coinsurance provision and an "inside limit" oI $100
on a daily room and board and $35.000 "inside limit" surgical. Mr.
Paine is hospitalized and his expenses are as Iollows:
Surgery............................................................................. $40.000
Rm&BrdlOOdays ( $125/day...........................................12.500
Other covered charges...................................................... . 10.000
Total bill (within the $100.000 policy limit).....................$62.500
The insurance company would pay:
Surgery (inside limit)........................................................$35.000
Rm & Brd (inside limit) ......................................................10.000
Fully covered charges....................................................... . 10.000
55.000
Coinsurance 80/20.................................................................. . x .80
Ins. Co. pays.......................................................................44.000
$62,500
-44,000
Notreimbursed .................................................................$18.500
"STOP-LOSS" PROVISION
The non-reimbursed portion oI the bill ($18.500) in the previous ex-
ample. would be tax deductible so the blow would be somewhat
lessened depending on Mr. Paine's tax bracket. Better still would be a
stop-loss provision that limits the insured's liability to a certain max-
imum amount each year. For instance. iI Mr. Paine had a stop-loss oI
43
$10.000 per year per person in his policy. the insurance company
would pick up an additional $8.500 oI expenses. Mr. Paine would
have his losses stopped at the $10.000 Iigure and would not be liable
Ior more than that Iigure in any one year as Iar as his own medical ex-
penses are concerned. This would be true even iI his expenses reach-
ed the $100.000 limitthe insurance company would have to pay
$90.000 in such a case. It is evident that a stop-loss provision negates
the coinsurance provision where catastrophic illness is concerned.
COMPREHENSIVE COVERAGE
Comprehensive coverage is really a combination oI basic and maior
medical insurance. It usually requires smaller deductibles than maior
medical and deletes the coinsurance provision Ior certain basic
policies.
EXCESS MAJOR MEDICAL
Excess maior medical applies only aIter other medical coverage has
been exhausted and when there is no stop-loss provision. In Mr.
Paine's case. iI complications arose it is conceivable his $100.000
limit could have been reached during a calendar year. Excess maior
medical is intended to cover catastrophic situations and should be
considered when deciding on a total insurance package.
MEDICARE AND WORKERS COMPENSATION
Persons over age 65 are eligible Ior hospital insurance which includes
up to 100 days oI home nursing or nursing home care beyond the
hospital stay. The supplementary medical insurance (SMI) will
generally pay 80 oI such persons' medical services aIter a $75/year
deductible. II you. or a Iamily member. is 65 or over. be sure to read
a more detailed account oI the coverage provided under these pro-
grams. See the suggested reading list at the end oI this chapter.
Workers compensation provides unlimited beneIits to employees
who are iniured or contract an illness as a result oI and while on the
iob.
44
GROUP INSURANCE
Group insurance is the most common type oI coverage in the United
States today. One can usually obtain broader beneIits at lower cost iI
one is covered as a member oI a proIessional group. a service club or
as an employee oI a covered company. However. Ior a slightly
higher premium one may ioin associations such as Blue-Cross Blue-
Shield or Kaiser as a non-group subscriber and receive similar
beneIits.
With both spouses Irequently working nowadays. it is not un-
common to Iind oneselI covered under more than one group policy;
once as a subscriber and again perhaps as a dependent oI a spouse.
Group policies have provisions. however. limiting beneIits to 100
oI expenses covered so there can be no duplication or windIall Ior the
insured covered under more than one group policy.
Normally children as well as spouses are covered under group
plans and sometimes dependent parents are also included. Policies
vary as to when beneIits cease but the decisions are generally based
on age and whether the child is handicapped or is still a Iull-time stu-
dent.
RENEWAL PROVISIONS
Because one's health is likely to change over a period oI time. a con-
sumer should take a good look at renewal provisions when purchas-
ing health insurance. There are three classiIications to consider.
Renewal at the option of the insurer is the least desirable alter-
native Irom the insureds' point oI view. The insurance company
reserves the right to periodically reevaluate the insured in terms oI
possible deteriorating health and economic conditions in general.
The insurer can cancel the policy. raise premiums and insert restric-
tions as to the Iuture coverage oIIered.
The second category is the guaranteed renewable policv which
prohibits the insurance company Irom cancelling or changing
coverage or raising premiums unless the entire class oI policy holders
is aIIected.
The most lenient renewal provision is the non-cancellable ("non-
can") policv which gives the insurance company no right to make
45
any changes in the consumers' coverage or premiums as long as the
policy is kept in eIIect by the oIIer oI timely payments.
OI course the trick when evaluating insurance is to weigh the cost
against the privilege. In this case the more lenient the renewal provi-
sions in a particular policy. the higher the premiums will be.
However. the higher cost may well be worth it to a consumer who
anticipates Iailing health because oI Iamily history or some other
reason and thereIore does not want to risk being turned down Ior
coverage in Iuture years or having to pay prohibitive premiums Ior
inadequate coverage.
SUMMARY
Basic medical coverage is limited as to the beneIits provided and has
relatively low policy limits in this age oI soaring health care costs.
Most people Iind maior medical coverage preIerable and almost
necessary. High limits on beneIits are possible by using deductibles.
coinsurance provisions and inside limits to bring the premiums
within the range oI most consumers. Coupled with stop-loss provi-
sions. the risk oI catastrophic illness is adequately eliminated. There
are many providers oI health insurance but group plans are the most
popular. The maiority oI workers receive some such coverage Ior
their Iamilies through their employment. OIten premiums are paid
by their employer as a Iringe beneIit oI the workplace. You should
Iamiliarize yourselI with the provisions oI government policies such
as workman's compensation and medicare. Make sure you check to
see exactly what the renewal provisions are beIore you buy a par-
ticular policy and weigh the beneIits to your speciIic situation against
the cost.
Fill out the Iollowing worksheet (in your special notebook) and
check out the reading list at the end oI this chapter.
46
WORKSHEET-CHAPTER FOUR
MEDICAL EXPENSE COVERAGE
NSURED WHO PAYS MAXMUM
NSURER (SELF OR PREMUM BENEFTS
(COMPANY) DEPENDENT) (AMT?) CO-NS? $$ DEDUCTBLE?
Basic
Medical ..........._______________________________________________________________________
Major
Medical ..........._______________________________________________________________________
HMO (Kaiser
^ Blue Cross
Blue Shi el d,
etc.)..................._______________________________________________________________________
Excess
Medical ..........._________,______________________________________________________________
Other...................______________________________________________________________________
Medicare
(65 + ) ..............____.___.___._____________________________________________________________
Did you find duplicate coverage?
_____________________________________________________________________________________
Are there unmet needs? ________________________________________________________________
RECOMMENDED READING
CHAPTER FOUR
The Consumers Book of Health. by Jordan Braverman
Life and Health Insurance Handbook. by Gregg & Lucas
The Medicare Answer Book. by Geri Harrington
The Corner Drugstore. by Max Leber
"Health Policy: The Legislative Agenda" and "National Health
Issues." both by Congressional Quarterlv. Inc.
For inIormation you might write to:
Public Citizen Health Research Group
2000 P Street N.W.
Washington. D.C. 20036
Consumer Coalition Ior Health
930 F Street N.W.
Washington. D.C. 20004
Medicine in the Public Interest
65 Franklin Street
Boston. Massachusetts 02110
48
Unemplovment
Insurance
GOVERNMENT CONTROLLED
UNEMPLOYMENT INSURANCE
THE ACT
The Federal Unemployment Insurance Act. like Social Security and
other social programs. was a product oI the depression ridden 30s.
Originally beneIits were extended only to certain groups oI workers
and those persons Congress Ielt had been "uniustly" laid oII work
through no Iault oI their own.
During the Iairly recent economic recession oI 1975 the "saIety-
net" was extended to provide beneIits to Iarm workers. domestics
and others who had been leIt out when the original Act was im-
plemented.
CALIFORNIA AS AN EXAMPLE
You can pick up a booklet. and should do so. at your local
unemployment oIIice. which will explain the beneIits you are enti-
tled to iI you should lose your iob. The states. while conIorming to
Iederal guide lines. have varying rules Ior eligibility and beneIits.
There are more than two hundred oIIices to help you in CaliIornia.
49
To Iind the one nearest you look in the telephone book under
CaliIornia State oIEmployment Development Department.
You should Iile Ior beneIits immediately upon losing your iob
even though there is a one week elimination period (waiting period
beIore you become eligible to receive beneIits).
In CaliIornia you may normally receive beneIits up to 26 weeks
in a 52-week period and Ior an amount equal to roughly one-halI
your Iormer weekly pay. A table in which you can Iind your speciIic
beneIits (as well as more detailed inIormation) is Iound in the booklet
provided by the State.
TRULY AN INSURANCE POLICY
Like any insurance policy. money (premium) is paid to the insurer
(government) periodically so that it is available to an employee
should he Iind himselI without a iob. Like some group health in-
surance policies. the premium is paid by the employer not the
employee (beneIiciary) who receives the beneIits. The one big diI-
Ierence is that whereas health insurance is an optional Iringe beneIit
provided as a supplement to wages. unemployment insurance is a
mandatory payroll tax in order to Iund the program. There are ex-
ceptions and modiIications to this broad statement. II you consult
the recommended reading list at the end oI this chapter you will Iind
suggestions on where to get more details. II you live in Alaska.
Alabama or New Jersey there are unique rules in your state so be sure
to check with your appropriate state agency.
THE BEST INSURANCE
AGAINST UNEMPLOYMENT
The best insurance against unemployment is to have several skills
and alternate sources oI making an income.
CHOOSE YOUR EMPLOYER WITH CARE
It is Ioolish to be totally at the whim oI an employer. Even a healthy
business in a stable economic environment can go bankrupt. It is not
uncommon to hear oI a situation where a son or other Iamily
50
member takes over the business aIter the Iounder's death and
through lack oI care. skill or perhaps with a subconscious revenge.
runs the enterprise right into the ground! That is the type oI situation
an employee cannot guard against iust by making an initially wise
choice oI employers. Even the right industry. at the right time with
the right employer can end up wrong with the passage oI time. Ask
the aerospace engineers in Seattle in the 70s!
WE CAN'T FORESEE THE FUTURE
The whole science (art) oI risk management is premised on the un-
Ioreseeability oI the Iuture. Precisely because we don't know what
tomorrow will bring we must be prepared Ior the worst. II we could
Iast Iorward our lives and see that our house would not be broken in-
to or suIIer a Iire or that the entire Iamily would escape ever being in-
volved in an automobile accident. we could immediately cancel our
auto and Iire insurance coverage and pocket the savings in
premiums.
OFTEN OVERLOOKED RESOURCES
It is amazing how many resources the average American has to Iall
back on iI he should lose his iob. and he may not even know it!!
IF YOU WERE TAUGHT YOU CAN TEACH
Did you ever take lessons when you were a kid? Lessons in what. you
might ask. Anything you can imagine! Musical instruments. voice.
dance. exercise classes. gymnastics. sailing. Ilying. swimming. high
diving. scuba diving. wind surIing. drama. ceramics. art. leather-
work. woodcarving. ice or roller skating. skiing. archery. sharp-
shooting. cooking. sewing. writing. martial arts. boxing. etc.. etc.
Chances are. iI you were taught you can teach. Try and
remember how it was done. II you're not sure how to start someone
out. take a Iew lessons now. or sit in on the lessons oI your own
child. Iriend or neighbor. Make sure you get permission Irom the
pupil and teacher Iirst.
51
PUT YOUR SKILLS AND TALENTS TO WORK FOR $$
OI course. not all people make good teachers but talent and skills can
be used to bring you income in other ways. Perhaps your music
lessons "took" and you have kept your proIiciency high enough to
get a iob as a musician in your area. Try "moonlighting" at Iirst on
certain nights or on weekends. Maybe you can organize your own
group. II you tend toward the more classical approach you might get
a iob playing the organ at a local church or giving recitals several
times a year.
II you have a boat or plane you might take tourists out on
weekends Ior a pleasure excursion. (Make certain you charge enough
to at least cover the insurance which may well be too high Ior a part
time business to handle.)
OI course the products oI many oI the skills you have acquired
could be retailed. We all know about the successIul pottery or wood-
carving business that started as a basement hobby.
I haven't even mentioned the skills that are not Iormally taught
but that you may have picked up over the years in an attempt to save
yourselI money and because you Iound you were good at it and lov-
ed doing it. I'm reIerring to plumbing. carpentry. painting. auto
mechanics. gardening. etc.; the skills the rest oI us depend on and Ior
which we are willing to pay "big bucks."
YOUR FAMILY AS AN EMERGENCY ASSET
By now you should be looking at yourselI and your Iamily in a diI-
Ierent light. You might be seeing dollar signs on Judy's cinnamon
rolls that have won Iirst prize at the Iair the last seven years. Molly
has been taking piano lessons since she was Iive. She could probably
teach the neighborhood children she now babysits Ior and Ior a lot
more money. Son JeII can Iix anything; toasters. TVs. vacuums. He
could advertise his skills and get paid.
You may understandably not want to exploit (what a "loaded"
word) any oI these talents. I hope you are comIortable at the mo-
ment and enioy being the guy whose son can Iix anything Ior your
"all thumbs" associates at the oIIice. I understand that it gives you a
Ieeling oI pride when everyone asks Ior Judy's baked goods when a
52
party is being planned and would iust love it iI you could only coax
Molly to play a Iew pieces.
Fine! That's the way I hope your liIe will remain. But remember
these skills are also insurance.
NO AFTER-WORK SKILLS OR HOBBIES?
Is it possible you've read this Iar and don't see yourselI or Iamily in
any oI the illustrations? Highly unlikely but possible. It could be
you. the reader. are unattached with no present Iamily and have
buried yourselI in your one and only iob. Even iI you've never had a
lesson in your liIe. have had no time Ior hobbies. know nothing
about cars and live in an apartment where all the maintenance is
taken care oI by picking up the phone. you can still acquire
"unemployment insurance" in a myriad oI ways.
WAYS TO ACQUIRE THE SKILLS NECESSARY
TO INSURE AGAINST UNEMPLOYMENT
THE INSURANCE THAT PAYS YOU TO GET IT
The government. through the National and Coast Guard and other
branches oI the military. have Reservist programs. As a reservist.
you can learn. at the government's expense. iust about any skill
imaginable by applying Ior the desired training. Once more. you do
not pay to get this sometimes highly technical and potentially
lucrative knowledge. rather you are paid to learn! This training need
not interIere with your present employment. The time required as a
Reservist is usually a weekend per month and a Iew weeks at a time
Ior the extensive training sessions which can be arranged with your
employer. Chances are your employer will be proud to have a Reser-
vist in his employ. Such an aIIiliation is more likely to help rather
than hinder you in your present career. At any rate. by law your
employer must give you the needed time oII and cannot discriminate
against you because oI your Reserve status.
COMMUNITY COURSES
Be on the lookout Ior Iree courses oIIered in your community by the
53
YMCA. Red Cross. City or State Colleges and other public oriented
and sponsored organizations.
KNOWLEDGE FOR A FEE
Many trade schools oIIer night classes. You can earn credentials
which qualiIy you to work in iust about any Iield. You could qualiIy
as an assistant in the medical or legal Iield or learn to program and
work with computers. It never hurt to have a real estate or
bartender's license in your back pocket. It's possible to qualiIy as a
contractor or accountant by hitting the books hard. II you're willing
to put in even more study aIter your regular work day. there are
night law schools and university extension courses in most com-
munities which allow one to obtain academic degrees. A Iee is usual-
ly charged as tuition. A license or other evidence oI your competency
is only presented aIter the successIul passage oI one or more.
sometimes rigorous. examinations.
This type oI insurance is not Ior everyone. However. you should
know it is available to you.
It's crazy to cry about lack oI opportunity or equality in this coun-
try when it is all around you! There is nobody who could not give up
their regular TV time Ior study and could not raise tuition and book
money by working at one oI the Iast-Iood restaurants in town that are
always sporting a Help Wanted sign. Minimum wage iobs could be
temporary iI you use them to advance your position.
CORRESPONDENCEKNOWLEDGE BY MAIL
I was approached by a member oI the audience once aIter a speech in
which I had alluded to correspondence courses. "I have seen adver-
tisements in magazines Ior years." he said. "but until today I thought
those mail order degrees were a hoax." Perhaps some are; but what
amazed me is the apparent desire he suddenly had to pursue such a
course since / had endorsed them and pointed out their merits. He
had not written Ior any inIormation Irom the advertisers in an at-
tempt to prove they were charlatanshe iust thought they were!
Likewise. he seemed content to accept my word that they were OK
without doing any checking on his own. It is possible he might hit
upon an unethical outIit and not get value Ior his time and money.
54
The point I am making and will make again and again
throughout this book. is that you cannot go blindly through liIe with
any degree oI eIIiciency and success depending on your own vague
unsupported Ieelings or the unverified word oI others. Chart your
own course; don't leave it to others!
SUMMARY
Obtain inIormation Irom your State Unemployment OIIice before
you need it. II you are Iamiliar with the procedures Ior eligibility and
amount oI beneIits available in your state you can plan your other
insurance around these beneIits.
The best unemployment insurance is selI reliance. Don't let the
security and happiness oI yourselI and Iamily depend wholly on
your present employer. Have alternate plans made Ior supporting
your present liIe-style. Keep those skills and talents honed to a Iine
degree and acquire others iI necessary.
When Aristotle was asked the advantages oI learning he replied.
"It is an ornament to a man in prosperity. and a reIuge to him in
adversity." I rest my case!
55
WORKSHEETCHAPTER HVE
UNEMPLOYMENT INSURANCE
TO HELP YOU ANALYZE YOUR ASSETS
Make a separate list for each member of the family.
Have you had lessons in;
A musical instrument? (list them
Voice?
Dance?
Gymnastics?
Sailing?
Flying?
Swimming?
High diving?
Scuba diving?
Wind surfing?
Drama?
Ceramics?
Art?
List any marketable skills or
hobbies not mentioned above.
Such as:
Plumbing Auto mechanics Gardening
Carpentry Painting TypingOffice skills
Make a list of all licenses, credentials and academic
degrees.
List all the jobs you have ever held from age 14 on.
CONGRATULATONS!
56
all)
Leatherwork?
Woodcarving?
ce skating?
Roller skating?
Skiing?
Archery?
Martial arts?
Boxing?
Cooking?
Sewing?
Writing?
Other?
RECOMMENDED READING
CHAPTER FIVE
The Unemplovment Benefits Handbook. by Peter Jan Honigsberg
Your Legal Guide to Unemplovment Insurance. by Peter Jan
Honigsberg
America in Transition. Implications for Emplovee Benefits. by EBRI
(Employee BeneIit Research Institute)
Earning Monev Without a Job. by J.C. Levinson
Earn Monev at Home. by Peter Davidson
How to Make Monev at Home. by Shebar & Schoder
200 Wavs to Make Monev in Your Spare Time Starting with Less
Than $100. by John Stockwell & Herbert Holtie
184 Businesses Anvone Can Start & Make a Lot of Monev. by Chase
Revel
Sparetime Businesses You Can Run for Less than $1.500. by Scott
Witt
How to Make Big Monev in Your Spare Time. by Scott Witt
Sell Your Photographs. by Natalie Canavor
Career Opportunities in Crafts. by Elyse Sommer
How to Earn $15 to $50 an Hour and More with a Pickup Truck or
Jan. by Don Lilly
Entrepreneur Magazine
How to Publish Your Own Book. by L.W. Mueller
How to Start Your Own Small Business. published by Drake
The Craftsmans Survival Manual. by George & Nancy WettlauIer
How to Start Your Own Craft Business. by GenIan & Taetzsch
Earn Monev at Home. by Peter Davidson
Moonlighters Guide to a Sparetime Fortune. by Richard Michael
Turn Your Kitchen into a Gold Mine. by Alice & AlIred Howard
Working Free. by John Applegath
57
6
Disabilitv
Insurance
Disability is something that always happens to the other guy. I have
no trouble with that thoughtit shows a good healthy optimistic at-
titude. In Iact. iI one seriously believed he was Iated to be one oI the
disabled it would be hard to Iunction. Everything we do has some
element oI danger about it. II we thought we were the one destined
Ior permanent iniury it would be hard to Iorce ourselves to Ily in an
airplane. go on a Ireeway. turn on our Iurnaces. use power tools.
etc.. etc. We would naturally want to avoid the risk oI disability. but
it cannot be done while we still live a normal productive 20th century
liIe. We must be content to only reduce the risk oI disability by pru-
dent living. We can. however. transIer to insurance companies the
monetary risk that may be connected with a disability. In this
chapter we will explore the ways we can use insurance to minimize
disability caused income losses.
WHAT IS A DISABILITY
There are three deIinitions oI a disability commonly recognized by
insurers.
The "own occupation" deIinition states that a person is con-
sidered disabled Ior coverage purposes when he is no longer able to
59
engage in the duties pertaining to the occupation Ior which he was
trained and at which he was previously employed. This is the most
lenient deIinition Irom the insured's viewpoint. Smile iI your policy
uses this deIinition I
The "anv occupation" deIinition is stricter and makes it harder to
qualiIy Ior beneIits. A person must be unable to engage in any gain-
Iul occupation whatsoever. This is the deIinition used to qualiIy per-
sons Ior social security disability beneIits as well as being Iound in
some private policies.
The "split definition" is really a combination oI the other two.
Usually the "own occupation" deIinition is applied to the situation
Ior a period oI time and then the "any occupation" deIinition is used.
KINDS OF INSURERS
The government. through workman's compensation and social
security. is the largest insurer oI disabled workers. A Iew states. in-
cluding CaliIornia and New York. also have non-occupational
disability beneIits which provide beneIits Ior relatively short periods
oI time.
Group insurance is another source oI disability coverage oIten
provided by employers Ior their employees.
Individual policies are available Ior those who are not members
oI a group or to supplement other coverage. Disability provisions are
Irequently Iound in pension and retirement plans and as part oI other
insurance policies as in auto. homeowners. hospital and liIe in-
surance. Read your policies careIully to determine the existence and
extent oI any disability coverage you may have missed. The
worksheet at the end oI this chapter will give you a clear picture oI
your coverage Irom combined sources.
WHEN DO BENEFITS BEGIN AND END
The time that occurs between the iniury accident or onset oI illness
and the actual initiation oI beneIits is reIerred to as the elimination
period. The elimination period Ior social security beneIits is Iive
months. For other coverage the time can vary Irom as little as seven
60
days Ior illness and immediate beneIit Ior accident. to a one-year
elimination period Ior both accident and illness! The shorter the
elimination period. oI course. the higher the cost. Longer elimination
periods result in savings on premiums.
BeneIits can last anywhere Irom six months to the insured's
liIetime Ior accident-caused disabilities or to age sixty-Iive Ior
disability due to illness. That's when pension and government
beneIits take up the slack.
COMMON PROVISIONS
Even though we think oI disability occurring mainly as a result oI ac-
cident. coverage should deIinitely include disability due to illness as
well. A policy covering accidents only is too restrictive and even
though it costs less it does not provide adequate coverage.
Some policies have provisions requiring that the disabled person
be conIined to the indoors during the beneIit period. These are oIten
called "prison clauses" and should be avoided. It could be
psychologically deIeating to know your beneIits would be in ieopar-
dy iI you leIt your house!
"Coordination-oI-beneIits provisions" are Iound in most group
disability policies. BeneIits are usually reduced by the amount oI
beneIits payable under government disability policies and. but not
because oI. beneIits payable under individual disability income in-
surance.
There is usually a minimum period oI employment required
beIore a person qualiIies Ior coverage under an employer sponsored
disability plan.
Most group plans cover non-iob related iniuries as well as
disabilities contracted on the iob. This is commonly reIerred to as "24
hour coverage."
Sometimes provision is made Ior payment oI partial beneIits Ior
partial disability.
Provisions Ior guaranteed insurability. waiver oI premium and
double indemnity type clauses are Iound in many disability policies
but since they are more commonly associated with liIe insurance
they will be discussed in Chapter Seven.
61
WHO IS ELIGIBLE FOR COVERAGE
Obviously any consumer who purchases a policy or is insured by his
employer or through membership in a group. can obtain coverage.
Government insurance is almost automatic. II you are iniured in the
workplace you are covered by workman's compensation. Disabili-
ties ("any occupation" type) are automatically covered by social
security wherever they take place. A person may also be eligible Ior
beneIits because oI his relationship to the disabled party; i.e. because
he is a spouse or dependent.
BENEFITS (monthly)
Social security disability beneIits are computed on a Iormula involv-
ing the disabled person's Iormer salary and number oI dependents he
has and their ages. There is a maximum amount oI coverage allowed
per Iamily. These beneIits are tax-Iree Irom the Iederal government.
Group plans pay beneIits determined by computing a percentage
oI the insured's base salary up to predetermined maximums. For ex-
ample. 60 oI salary up to $2.000/month.
Individual policies can be purchased in any amount the consumer
can aIIord within certain limitations set by the particular company.
Insurers have "issue limits" which determine the maximum amount
oI monthly coverage they are allowed to write on a person. "Par-
ticipation limits" are restrictions on the amount oI coverage on any
one individual that a company. according to its rules. is allowed to
participate in writing along with other insurers. Naturally the limits
Ior participation with other companies is larger than the issue limit
would be. For example. an insurer might have an issue limit oI
$2.000/month and a participation limit oI $3.500/month.
HYPOTHETICAL MR. PAINE
Another visit to Mr. Paine may prove useIul at this point.
HYPOTHETICAL
Mr. Paine has been employed as a proIessional soccer player at a
base salary oI $48.000/year Ior the past two years. One night when
62
coming home Irom a party. he was involved in an automobile acci-
dent which leIt him paralyzed Ior liIe Irom the waist down. He had
dropped out oI law school. not Ior academic deIiciencies. but
because his soccer skills were in great demand and he could not resist
the temptation to cash in on his extraordinary talent. His disability
coverage as a member oI the soccer team was as Iollows: He was
eligible to receive beneIits under the plan aIter 18 months employ-
ment; the maximum beneIit is liIe Ior accident-caused disabilities and
to age 65 Ior illness; the elimination period is three months Ior acci-
dent and six months Ior illness; the coverage is "24 hour" (occupa-
tional as well as non-occupational); the deIinition oI disability is
"split." Iirst Iive years "own occupation." remainder "any occupa-
tion"; the beneIits to be paid are to be based on 50 oI covered
employee's salary up to a maximum oI $2.500/month.
An analysis oI his beneIits Iollows: Mr. Paine has met the
18-month eligibility provision because he has been with the team Ior
two years. Since his iniury was the result oI accident. his beneIits
could conceivably continue Ior the rest oI his liIe under this plan
depending on the outcome oI other determinations. He would have
to wait three months until beneIit payments would begin under this
policy (elimination period) and beneIits would not be retroactive to
the date oI the accident. Since the coverage is "24 hour" it is irrele-
vant that the iniury was not work-related but rather occurred com-
ing home Irom a social engagement. Under the "split" deIinition used
in this policy Mr. Paine would be eligible Ior beneIits iI he cannot
engage in his "own occupation" Ior Iive years. He would thereIore
receive those beneIits Ior that period oI time. Under the "any occupa-
tion" deIinition to be applied aIter the Iive year period is terminated
it is likely that Mr. Paine will be declared ineligible Ior beneIits.
There are many occupations which do not require the use oI legs and
Ior which Mr. Paine would probably Iind himselI qualiIied. Among
those is the practice oI law Ior which Mr. Paine was partially trained.
According to this policy. during his Iive years oI apparent eligibility
Mr. Paine should receive 50 oI his base salary or $2.000/month.
($48.000/year -*- 12 $4.000/month. 50 oI which is $2.000).
Because group plans coordinate beneIits it is likely the insurance
company would have those payments cut in halI due to approx-
63
imately a $1.000/month beneIit Mr. Paine would be receiving Irom
social security disability coverage.
SUMMARY
It is wise to look at disability coverage in the light oI your entire in-
surance package. You may Iind you are covered under multiple
sources such as workman's compensation. a group plan. individual
supplemental plan and perhaps auto or liability policiesyour own
or a third party's. You must check the coordination oI beneIit provi-
sions along with the various elimination periods. Analyze your
policies careIully to determine the deIinition oI disability used in each
case. the perils covered. the extent oI the beneIit period and the
amount oI beneIit dollars available to you as compared with your
normal and hoped Ior standard oI living. II you Iind your present an-
ticipated beneIits would be inadequate but you don't want to add to
your premium costs. consider setting dollars aside to invest in an
emergency Iund.
II you diligently Iill out the worksheet at the end oI this chapter
you may be pleasantly surprised by unveiled coverage you didn't
suspect you had.
Consult the recommended reading list iI you have more ques-
tions and oI course your own individual insurance agent. who. by
the way. should Iind it a delight to discuss insurance with a client
who knows the terminology. the questions that need asking and is
able to understand a direct answer rather than depending on the old
reassuring platitudes like: "Don't worry. I'll take care oI everything."
For some oI you that was possibly the extent oI your Iormer com-
munication with your insurance proIessional. How does it Ieel to be
in control?
64
RECOMMENDED READING
CHAPTER SIX
How to Stav Ahead Financiallv. by Philip Gordis
Jobs for the Disabled. by Sar Levitan & Robert Taggart
The Rights of Phvsicallv Handicapped People. by Kent Hull
The Source Book for the Disabled. by Glorya Hale
65
WORKSHEETCHAPTER SIX
TOTAL DISABILITY INCOME AVAILABLE
SOURCE Month
1
Months
2-5
Month 6
until your
youngest child
reaches 18
From when
youngest child
reaches 18 until
you reach age 65
A. GOVT.
1. Social Security
benefits.............................
$ $ $ $
2. Workman's
Comp
....................................
$ $ $ $
3. State
....................................
$ $ $ $
4. Other
....................................
$ $ $ $
B. Employer
"sick pay" .........................
$ $ $ $
C. Group Disability
ncome ns........................
$ $ $ $
D. ndividual Disability
ncome ns........................
$
$
$
$
$
$
$
E. Riders to Life ns..........
$
F. From Pensions .......... $______________ $______________ $______________ $______________
G. Profit-
Sharing Plans ............ $______________ $______________ $______________ $______________
H. From non-
qualified deferred
compensation plans . $______________ $______________ $______________ $______________
. From HR-10 Plans ... $______________ $______________ $______________ $
_____________________________________
J. From TSA Plans......... $______________ $______________ $______________ $_____________
K. Other
5 Disability benefits... $_______________ $______________ $______________ $______________
L. Estimated income
from invested
Emergency Fund .... $_______________ $______________ $______________ $______________
M. TOTAL
(A L)........................ $ ___ $ ___ $ ___ $ ___
THE DEAL AMOUNT YOUWOULD LKE TO HAVE AVALABLE F DSABLED:
N. DEALZED GOAL . . . $______________ $______________ $_____________ $_____________
AMOUNTS, F ANY, NEEDED TO MEET YOUR DEALZED GOAL (N minus M)
O. AMOUNT..................... $ ____ $ ____ $ ____ $ ____
Death Prematurelv
Life Insurance
LIFE INSURANCE AS AN ESTATE SUBSTITUTE
In your 20s and 30s when you are likely to have many dependents
and Iew material assets. liIe insurance serves as an eIIective estate
substitute. In the event oI your premature death. your liIe insurance
would provide economic support to those leIt behind.
LIFE INSURANCE AS AN ESTATE BUILDER
In your 40s and 50s you probably have already acquired a home and
other substantial assets. Now liIe insurance should be viewed as a
savings and investment tool that helps build your growing estate.
LIFE INSURANCE PROVIDES ESTATE LIQUIDITY
In your 60s and 70s you have Iew dependents and a well built up
estate. At your death your spouse will be taken care oI by social
security. pensions or other retirement Iunds. LiIe insurance. a protec-
tion against premature death. should now provide liquidity Ior your
estate during probate. (A more in-depth discussion oI insurance Ior
this period oI liIe is covered in Section Six.)
69
KINDS OF LIFE INSURANCE
There are as many kinds oI liIe insurance as the mind oI man can con-
ceive. For the sake oI brevity we will discuss three arbitrary
categories; individually purchased policies. group insurance and
government sponsored coverage.
INDIVIDUALLY PURCHASED INSURANCE
Term. This kind oI insurance aIIords the greatest protection Ior your
dollar. Because it is the most inexpensive kind oI coverage. young
people with limited Iinancial resources oIten Iind term insurance
meets their short range needs. Term insurance is purchased Ior a
speciIic period oI time. There is no cash value build-up over time; the
entire premium goes Ior protection. It is sometimes used to supple-
ment other policies or when extra protection is desired temporarily.
Since no portion oI the premium is set aside as savings or investment.
it is possible to purchase a high dollar amount oI coverage Ior less
than a lower dollar coverage would cost Ior other types oI insurance.
Premiums can be paid at a "level" amount over the term oI the policy
or in "decreasing" amounts iI coverage needs decrease over the same
period oI time.
Whole Life. Whole liIe insurance. as its name implies. is coverage Ior
the whole liIe oI the insured as opposed to a speciIic period oI time
(term). Payments (premiums) do not necessarily have to continue
over the liIe oI the policy (which. by the way. corresponds to the liIe
oI the insured) but iI they do. the policy is reIerred to as a "straight"
or "ordinary liIe" policy. II premiums are to be paid only until the in-
sured attains a speciIied age or Ior a certain number oI years. the
policy is called a "limited payment" policy. It diIIers Irom term in-
surance in another important way. A portion oI the larger premiums
is set aside with each payment as a savings account. The build-up oI
this "extra" premium keeps compounding interest over time and
results in a cash value Iar beyond what is paid in. OI course the cash
value oI the policy varies at any given point in time.
Whole liIe insurance is probably the most popular Iorm oI liIe in-
70
surance Ior those who can aIIord the premiums because it combines
saving with protection.
In the last several years all sorts oI policies have arisen with ways
oI using the savings portion oI the premium Ior investments (variable
liIe policies) or tailoring the size oI the premiums to the desires oI the
consumer; i.e. allowing smaller payments during anticipated leaner
periods oI the client's liIe. etc.
Premiums can be paid monthly. quarterly or any convenient way
you and your agent agree upon. The most economical way. iI you
can do so without signiIicant hardship. is to make annual payments.
That way your premium will be compounding interest Irom the
beginning oI the year and there will be no "service charge." It may
also be useIul to note that it is less expensive to buy one large policy
than several small policies.
Endowment. An endowment policy is another type oI savings ac-
count. Although it insures against death Ior a speciIied period oI time
rather than Ior the whole liIe oI the insured. the premiums are higher
than term insurance premiums. the extra cost going into the build-up
oI a cash value. Endowment policies are actually a hybrid oI term
and whole liIe insurance.
GROUP POLICIES
Group policies have been mentioned earlier when discussing health
and disability insurance. This kind oI liIe insurance has the same
characteristics earlier noted in group plans. Premiums are usually
lower than individually purchased policies thanks to group rates.
When provided by an employer. group liIe insurance is considered a
Iringe beneIit. Another Ieature which distinguishes group policies
Irom individual liIe policies is the Iact that evidence oI insurability is
not required; i.e. there is no necessity Ior a qualiIying medical ex-
amination as there is when you apply Ior an individual liIe insurance
policy.
GOVERNMENT SPONSORED LIFE INSURANCE
Social security. while not commonly thought oI as liIe insurance. is
really iust that. It provides beneIits to the Iamily oI a deceased
71
worker through a Iormula determined by taking a percentage oI
what the insured would have received as retirement beneIits had he
reached age 65. You should Iamiliarize yourselI with eligibility re-
quirements and beneIits. For more detailed social security inIorma-
tion consult the reading list at the end oI this chapter.
Another government-sponsored liIe insurance program is SGLI
(Servicemen's Group LiIe Insurance) which in 1965 replaced older
service related programs. It provides inexpensive coverage Ior per-
sons on active duty in one oI our services. I would advise anyone
with an eligible Iamily member to check with the respective service
Ior more inIormation.
A COMMON RIDER FOR PEOPLE
WITH YOUNG FAMILIES
There are many variations oI the "Iamily income" liIe insurance
policy or rider. People with young children should discuss with their
agent. the desirability oI obtaining this special coverage.
Basically a policy Ior a certain amount is purchased to cover the
period when the children are dependent. The insurance company is
obligated to make payments to the beneIiciaries oI $10. $15 or $20
per each $1.000 oI Iace amount iI the insured should die beIore the
time period is up. For example; iI the insured should die Iour years
aIter purchasing a policy which was written Ior $70.000 over a 20
year period at $10 per $1.000 the surviving Iamily would get $700 per
month Ior 16 years (20 yr. term minus the Iour years the insured lived
aIter purchasing the policy) and $70.000 Iace amount at the end oI
that time. The coverage combines a basic whole liIe insurance policy
with a term coverage. either decreasing or level depending on the
particular variation. It is a popular Iorm oI coverage and may pro-
vide iust the protection you need iI you are a young person starting
to raise a Iamily. OI course it costs more than term insurance. Your
particular Iinancial circumstances must be considered by you and
your agent or other proIessional planner to determine iI it should
have a place in your Iinancial plan.
72
DIVIDENDS
Dividends are issued only by participating liIe insurance companies.
These companies can be regular stock companies or mutual com-
panies where every policy holder owns a piece oI the company; a
co-op system. In order to issue a dividend the company must charge
premiums in excess oI what is actually distributed to its holders as
death beneIits. The amount oI dividend. iI any. is determined on the
mortality rate oI its presently insured participants as well as on how
eIIiciently the company is managed and how well its investments
have done. All mutual liIe insurance companies are participating.
The stock companies that are not participating charge a Iixed rate
Ior their premiums. The premium is calculated to cover all expenses
with no "extra" to be reIunded in the Iorm oI dividends. It is not
possible to determine in advance which type oI policy will be
cheapest in any given year. When the dividend oI a participating
company is small the Iixed premium oI the non-participating com-
pany would save you money. On the other hand. in a year with high
dividends returned to policy holders. the participating company
would be your best bet.
WHAT HAPPENS WHEN
YOU STOP MAKING PREMIUMS?
Term liIe insurance coverage is similar to putting your dime in a
dryer at the public laundromat; when the time paid Ior runs out. the
dryer stops. II you want more drying time you put more money in
the dryer. Under the provisions oI term liIe insurance contracts.
when payment stops. the coverage simply terminates. AIter all. you
were only paying Ior a certain period oI coverage.
Whole liIe coverage with cash value poses a diIIerent problem. II
Ior some reason you can no longer continue paying premiums do
you lose everything that has been built up over time?
The answer is no. A choice that is always open to you is to cancel
Iuture protection and take the cash that has accumulated in the
policy up to that point in time. A second alternative is to reduce your
amount oI coverage and replace your Iormer policy with a newer
73
smaller paid-up policy. However. iI you still need the Iull amount oI
coverage provided by the original insurance policy. you can buy a
paid-up term policy instead. Just how long a term you can purchase
will be determined by the cash value oI the old policy and your age at
the time oI the conversion.
USING YOUR WHOLE LIFE POLICY
AS A FINANCIAL TOOL
It is always possible to borrow against the cash value oI your whole
liIe insurance policy iI you should need cash Ior any reason.
TO MAINTAIN PREMIUMS
It may be wise to include provision Ior an automatic premium loan in
your policy. When a premium is not paid the premium amount is
automatically deducted Irom the cash yalue. An agreed upon interest
rate is charged. usually below market rates. The loan can be paid
back at any time. and should be whenever possible. because iI it is
still outstanding at the insured's death the proceeds due the
beneIiciaries will be reduced accordingly.
GRACE AND REINSTATEMENT PERIODS
It should be noted that there is usually a thirty-one day grace period
which keeps the policy in Iull Iorce during this time even though the
premium is overdue. This is useIul to cover inadvertent lapses.
Even when the grace period has ended. the insured generally has
three years to reinstate the policy without losing any beneIits. The
payment oI all back premiums is required as well as the ability to
show evidence oI current insurability.
You might say. "Why not get a new policy and save all those back
premiums?" II you had taken out the policy and had been making
payments Ior twelve years beIore you Iound yourselI unable to con-
tinue. you would be (counting the reinstatement period) at least IiI-
teen years older and subiect to higher premiums because oI your age.
. There are numerous other reasons that would make your older
74
policy more desirable than starting again with a new policy. For in-
stance. you don't have to start all over building a cash value Irom
day one; your older policy may have better interest rates. as well as
options and other liberal provisions no longer available in a new
policy.
COLLATERAL
Besides taking loans against the cash value oI the policy. the policy
itselI may be oIIered as collateral Ior a bank or other commercial
loan. II the loan amount is not paid back according to the terms oI
the agreement. the lender becomes the owner oI the policy. OI course
any person or entity can become owner oI a policy insuring the liIe oI
a third party as long as he can show an insurable interest. Indeed. this
is oIten advisable. as we shall see when we discuss probate costs in
Section Six a little later on.
HOW MUCH LIFE INSURANCE
SHOULD YOU PURCHASE?
The worksheet at the end oI this chapter will help you make this deci-
sion. AIter the insured's death there are special. continuing and
Iuture expenses which must be calculated in dollar terms. The obiect
is to ensure the deceased's Iamily can live in the manner they are used
to or could have looked Iorward to had the deceased not died
prematurely.
Because oI the constant changes in laws and the uncertainty some
people Ieel about social security. you may want to calculate needs
without taking government insurance into consideration. OI course.
iI all goes well. you will be that much ahead. However. to plan
without relying on governmental promises you must be willing to
stretch. iI need be. to aIIord the larger premiums necessary Ior higher
coverage. Don't Iorget to take into consideration other investments
and possible inheritances which may make extra dollars available
when the kids are ready Ior college. Ior example.
Some planners suggest as a rough calculation. you should have
liIe insurance coverage equivalent to Iive years expenses; that being
75
the time thought necessary Ior a Iamily to "get back on its Ieet." Un-
Iortunately the determination is not as simple as that. II you are not
mathematically inclined. you may need help in Iiguring Iuture
values. InIlation. interest compounding. and time must all be Iigured
to determine the amount oI insurance that will cover your Iuture
needs in terms oI Iuture dollars. Your insurance agent or other pro-
Iessional can do the calculations Ior you once you have gathered the
inIormation. AIter all. that is the purpose oI this book and especially
the worksheets; to help you gather inIormation Ior consultation with
your proIessionals at a reduced Iee.
DESIGNATING BENEFICIARIES CAN BE TRICKY
In most cases the insured is the owner oI the policy on his own liIe
and as such reserves the right to appoint and change the beneIiciary
oI the policy at any time up to his own death. We will see in our
discussion in the Section dealing with Estate Planning. why this ar-
rangement is not always desirable. For now. however. let us concen-
trate on who these beneIiciaries might be.
Most oIten the spouse is designated as beneIiciary with children
as contingent (alternate) beneIiciaries. It is always wise to appoint
more than one beneIiciary in case the Iirst appointed Iails to survive
the insured. It is also a good idea to name the beneIiciary as well as
adding a descriptive phrase. For instance; "Mary Smith. iI she is my
wiIe at the time oI my death." II you simply said. "Mary Smith." or
"... to my wiIe." she may have divorced you and is now known as
Mary Jones and the wiIe oI another. To you. "my wiIe" means the
person you are married to at the time oI your death but legally this is
not clear. The law cannot distinguish Irom those two words whether
you reIer to the woman you were married to when the policy was
written or the woman you may have subsequently married.
Because oI the technical diIIiculties so oIten encountered in this
area. I would urge you to get an attorney to look over this important
aspect oI your policy. The small Iee involved is nothing compared to
the court costs which are a natural product oI such ambiguities.
76
INSURANCE PROCEEDS
There are several alternatives to receiving liIe insurance proceeds all
at once; i.e. in a "lump-sum."
INCOME FOR LIFE
The income Ior liIe option is similar to a normally purchased annui-
ty. Here. in exchange Ior letting the insurance company have the use
oI the proceeds due you as beneIiciary (as a result oI an insured's
death) the company promises to provide you with an income Ior liIe.
II you. as beneIiciary. are in poor health this would. oI course. be a
Ioolish option. Even iI you are relatively young and in excellent
health you might be able to make better use oI the insurance proceeds
yourselI. It may be possible to generate a better cash Ilow through
sound investments than what the insurance company is oIIering.
BeIore opting to receive proceeds under a "Ior liIe" plan. weigh the
consequences careIully. Once proceeds begin to Ilow it is too late to
make a change. The liIe income option may take many Iorms:
Pure LiIe Income. The pure liIe income option provides the highest
monthly income. The company simply promises to pay a predeter-
mined amount each month to the beneIiciary until his death. Since
there is no provision Ior "reIunds" it is quite possible the insurance
company can come out way ahead. II the proceeds are large the
monthly income payments must be equally large in order to use up
the proceeds during the beneIiciary's liIetime. When the beneIiciary
dies beIore all the proceeds are paid the insurance company
"pockets" the remainder. On the other hand. the beneIiciary could
come out ahead iI he could manage to outlive the proceeds. In such
an event the insurance company would have to dip into its own
"pockets" to come up with the promised monthly payments. But
don't bet on it; the payments are pre-determined to avoid iust such a
catastrophe Ior the insurerl
ReIund Option. Under this option. iI you choose to receive smaller
monthly payments Ior liIe. any proceeds remaining at your death
would be "reIunded" to a predetermined third party; either in a
"lump-sum" or in installments.
77
Minimum Time Period Option. Electing this option would
guarantee the beneIiciary monthly payments Ior liIe (again. smaller
payments than under the "pure liIe income option") but in no case Ior
less than a certain amount oI time. II you. as beneIiciary. didn't
outlive the "certain time" agreed upon. monthly payments would be
paid to a designated third party until the speciIied time period was
met. The insurance company would still be ahead here. but not as
much as in a pure liIe income situation where the beneIiciary dies
beIore many installments have been made.
Joint and Last Survivor Options. Joint and last survivor options are
Irequently used to pay endowment policy proceeds. The insured.
and perhaps a spouse or other party. are designated beneIiciaries and
are entitled iointly to the income while both are living with the
payments to continue to the survivor on either's death. (Remember.
endowment policies. although they have cash build-up. are Ior a
period oI time only and not the whole liIe oI the insured.)
OTHER ALTERNATIVES
It is possible to receive the proceeds oI an insurance policy other than
immediately or throughout one's liIe:
As a Savings Account. Proceeds may be leIt with the insurance com-
pany with either a limited or unlimited right oI withdrawal. The pro-
ceeds earn interest at an agreed upon rate with a guaranteed
minimum.
Proceeds to be Distributed over a Predetermined Period. Under this
option the amount oI each installment may vary according to Iluc-
tuating interest rates (generally with a minimum rate guaranteed) but
the period oI time over which payments are made is predetermined.
Installment Amount Predetermined. This option states the amount
oI each installment is predetermined but iust how long such
payments will continue depends on Iluctuating interest. as in the op-
tions mentioned above. The installments continue. anyway. until
the entire proceeds are exhausted.
78
SUMMARY
LiIe insurance has many uses in addition to the protection it provides
against the risk oI premature death. The type oI insurance that is
right Ior you and how much you should buy will depend upon your
age and particular circumstances. You should seek proIessional help
in designating your beneIiciaries and in determining the amount oI
coverage you will need to buy presently in order to meet Iuture
needs. Be aware oI the many settlement options open to you beIore
deciding how the proceeds should be distributed iI you are a
beneIiciary. Consult the recommended reading list. especially to Iind
additional inIormation regarding social security. The worksheets
will give you a better understanding oI how your present coverage
compares with your ideal coverage.
ONE WISH:
May you be lucky enough to Iind an insurance agent like the one
who wrote a policy on a 97-year-old man. When questioned by his
superior the agent replied. "I checked with the computer and
statistics show that Iew men die aIter age 97!"
79
LIFE INSURANCE WORKSHEETCHAPTER SEVEN
nsurer
Company
Name
Owner
of
Policy
nsured Face
Amount
Amt. of
Premium
(Annual)
Who Pays?
Estimated
Cash
Value
Loan
Now
Against
Policy
Term?
#of
Years
Dividends
(Annual)
00
o
WORKSHEETCHAPTER SEVEN
OTHER DEATH BENEFITS
1. ncome producing assets that would be available to your
family (heirs). nclude separately owned, jointly owned and
community property. Multiply by reasonable aftertax invest-
ment rate of return.
$____________________
2. Property likely to be acquired by family from parents,
others or trusts via inheritance or gift. (Estimate amount and
give some idea of time period.)
$____________________
3. Other death benefits such as: social security survivorship
benefits, annuities, nonqualified deferred compensation
plan, pension and profit-sharing plans, HR-10, RA, TSA, or
other employer sponsored plans.
$____________________
4. Total the face amounts of all life insurance listed on
previous worksheet and subtract any outstanding loans that
may be against them.
$____________________
5. Sum of all available death benefits = income available to
family. (#1 thru #4 above)
$____________________
6. Compare estimated income available to family with
"BUDGET" (found in Section Four Chapter 15 Worksheet)
which you should modify to your own specifications. Take in-
to consideration your own unique projections regarding the
future inflation rate and any special medical or educational
needs that you can foresee for your family.
$____________________
81
7. s your family well provided for in the event of your
premature death? _________________
Do you need more life insurance or are you overinsured?
By how much?___________________________________
RECOMMENDED READING
CHAPTER SEVEN
How to Save a Fortune on Your Life Insurance. by Barry Kaye
The Life Insurance Conspiracv. by Spielmann & Zelman
Life Insurance. A Consumers Handbook. by Joseph Belth
Life Insurance. Irom the Editors oI Consumers Reports
How Your Life Insurance Policies Rob You. by Arthur Milton
Life Insurance. How to Get Your Monevs Worth. by Arnold Geier
Life Insurance. Theorv and Practice. by Robert Mehr
Tax Facts on Life Insurance. by Samuel Scoville
How Life Insurance Companies Rob You and What You Can Do
About it. by Walter Kenton. Jr.
FOR INFORMATION ON SOCIAL SECURITY REFER TO THE
READING LIST AT THE END OF CHAPTER SIXTEEN.
82
8
Liabilitv
and Propertv Insurance
Today. more than at any time in history. people tend to settle their
disputes in court. We have been described as a nation oI "Suers" (not
"sewers")- Awards to plaintiIIs in recent years have been
astronomical even when the deIendant's liability has not been based
on intentional wrongdoing or even negligence.
No matter how well a person has planned in all other areas oI his
liIe. iI he has inadequate liability coverage he risks being wiped out
Iinancially by a single lawsuit.
DISCOVER YOUR RISKS
It is impossible to avoid all risk. Even iI you were to stay in bed all
day your dog might bite a passer-by; a tree might topple and destroy
your garage or that oI a neighbor; Iire might break out in the base-
ment. with or without any negligence on your part; a Iamily member
might be involved in an accident with your car; the postman might
trip on the Iront stairs; your son might hit a baseball through old lady
FearIul's window. causing her to have a heart attack. and so on in-
deIinitely. From your bed you could Iind yourselI involved in a
myriad oI lawsuits; some oI them groundless! Like it or not. you
would be stuck with the trouble and expense oI deIending yourselI
83
against these claims unless you had the Ioresight to acquire property
and liability insurance in signiIicant amounts.
RELEGATE RISKS VIA COST-BENEFIT ANALYSIS
The worksheets at the end oI this chapter will aid you in discovering
your risks and perIorming a cost beneIit analysis. As we discussed
earlier in Chapter 3. we have Iour alternatives in dealing with risk.
(AART) Accept-Avoid-Reduce-or TransIer the risk. In relegating
each identiIiable risk to its proper category. we must view it in the
light oI our overall Iinancial picture. Since a home is oIten the maior
part oI a Iamily's net worth. the risk oI destruction can neither be ac-
cepted or wholly avoided. Certainly by proper maintenance and
good housekeeping (disposing oI old rags and papers as a potential
Iire hazard Ior example) the risk oI destruction to your home can be
reduced. Almost universally. however. people would agree the risk
must be transIerred.
HOMEOWNERS POLICIES '
Homeowners policies are not iust Ior home owners. there are special
policies Ior tenants also. Besides insuring your home against things
like Iire. lightning and vandalism. personal property coverage is
thrown-in and combined with the all important comprehensive per-
sonal liability coverage so necessary today. A homeowners policy is
cheap when compared with the price oI buying separately the three
policies mentioned above.
There are seven common variations oI homeowners policies. The
recommended reading list will point you to inIormation which will
explain more thoroughly iust how each policy diIIers. You and your
agent. by taking into consideration your speciIic Iinancial situation
and exposure to risk. should be able to decide on a homeowners
policy that is best Ior you.
84
CAVEAT (BEWARE)
II you recall. both health and liIe insurance policies had 31-day grace
periods in which your coverage continued even though the premium
was late. There are no grace periods. as such. when speaking oI
liability and property insurance. When premiums are late you're not
covered (unless another agreement can and should be worked out
with your agent in advance).
CPL (Comprehensive Personal Liability Insurance) does pay
property damage and Ior medical expenses incurred by a third party
whether the insured is to blame or not. OI course there are certain
legal technicalities; such as the determination oI "trespasser status"
and eliminating the possibility oI their having been an intentional
tort. However. the Iact remains that beneIits can be paid to a third
party regardless oI the insured's Iault; something that is oIten
overlooked by most people! ThereIore any accident or iniury should
be reported iI it occurred on your property or was caused by your
selI. Iamily. employee or animal.
You should. oI course. read your policy careIully paying par-
ticular attention to things that may suspend or reduce your coverage.
such as leaving a property vacant over a speciIied length oI time.
Although many oI the exclusions Iound in "all risk" policies can
be insured against with separate policies oI their own. you should be
aware oI them. A Iew are: Ilood. earthquake. proIessional and
business oriented liability. automobile. airplane and watercraIt
liability and damage to property used by or rented to or under the
custody oI the insured.
AUTOMOBILE INSURANCE
An automobile is oIten the second most valuable property a Iamily
owns (home being Iirst) and even more oIten it is the most
dangerous. You may want to protect the value oI your automobile
Ior your own sake. but many states require you to carry insurance
Ior the sake oI others; to protect other people Irom possible damage
inIlicted via your car. Such coverage extends to liability arising Irom
the ownership and the use oI automobiles. Like the modern
85
homeowners policy. there is a Personal Auto Policy which is more
comprehensive in its coverage than the earlier auto policies were. Be
aware oI the areas excluded Irom coverage when you buy your
policy. Nowhere does it pay more to shop than when purchasing
auto insurance! Although price is probably your main consideration
do not overlook the service record oI your particular agent. the
Iinancial strength oI the insuring company and the dividends certain
companies may pay.
DEDUCTIBLES
Everything that has previously been said regarding deductibles when
discussing other kinds oI insurance. applies to property and liability
policies also. It cannot be overemphasized that the higher your
deductible the more coverage you can aIIord. You should pay (and
thereIore budget Ior it) repair bills under $200 or $300 yourselI. That
is not the iob insurance was meant to do. Protection against
catastrophe is what you need and should try and obtain in the most
economical manner. Typically a premium increase oI $10 or $20 can
double or triple your liability coverage. Where else can you Iind such
a bargain?!
UMBRELLA CONTRACTS
OR EXCESS LIABILITY POLICIES
Umbrella contracts are insurance policies which appeared in recent
years in response to the "million dollar plus" awards in liability cases.
There is a required minimum limit oI underlying liability in areas
where coverage is available. The umbrella policy only provides Ior
deIense and pays liability claims aIter the limits oI underlying liabili-
ty policies have been exhausted. For example. iI you have auto
liability coverage with a $500.000 limit and the court awards Mrs.
Paine. a passenger in the car which collided with yours. $1.000.000.
the umbrella policy would pay the additional $500.000 beyond your
auto policy limit Ior which you otherwise would be personally liable.
OI course. the underlying limit requirements might be less than you
are presently carrying on some oI your policies. Check your limits on
auto. water and air craIt. CPL. proIessional policies and any others
you may have. II you are able to reduce the underlying coverage to
86
the point where your umbrella policy can take over. you will save
premium dollars on these underlying policies!
Extended coverage is available that normally exists only as part
oI the umbrella (no underlying policy required). Included here would
be protection Irom personal iniury claims. (usually Iound only in
business or proIessional liability policies) such as coverage Ior prooI
oI (or in deIense oI) Ialse arrest. invasion oI privacy. wrongIul entry.
Ialse imprisonment. libel and slander. II you have no underlying
policies in these areas then you must pay a deductible which can
range anywhere Irom $200/$300 to $1.000 or more depending on the
coverage you seek.
Even iI you think the chance oI being involved in a lawsuit is
small. the premiums are about the only thing I can think oI that stand
between you and potential Iinancial disaster iI you run up against
one oI Melvin Belli's colleagues in a courtroom.
SUMMARY ( D R I E R )
This chapter can brieIly be summed up using the mnemonic
D R I E R .
D discover your risks
R relegate those risks by use oI A A R T (either Accept. Avoid.
Retain or TransIer)
I insure wisely (employ a cost-beneIit analysis using deduc-
tibles)
E evaluate your insurer. Comparison shop. checking Iinancial
soundness. and service as well as cost.
R review periodically; your insurance coverage can quickly
become outdated.
87
WORKSHEETCHAPTER EIGHT
WHAT IS YOUR PRESENT EXPOSURE-
HOW MUCH LIABILITY CAN YOU HANDLE?
n your own notebook, answer the following questions:
1. Are you an employer, director or officer in a corporation or
any organization?
2. s there unusual exposure due to your profession,
business or personal activities?
3. Do you own or rent any real property, automobiles,
airplanes or watercraft?
4. Make an inventory list of your personal property. nclude a
brief description, purchase price and date of purchase or
when it was first acquired. Keep this list in a safety deposit
box.
5. Perform a cost-benefit analysis of your present property
and liability coverage. Carefully compare the premium price
with the coverage provided. Be aware of exclusion and non-
responsibility clauses. Are you making the best possible use
of deductibles? Are you over or under insured?
88
RECOMMENDED READING
CHAPTER EIGHT
You Can Save a Bundle on Your Car Insurance. by Paul Maika
So You Think Youre Covered. by Stanley Leinwoll
No Fault. by Paul Gillespie & Miriam Klipper
89
SydS P. Taccfl Meets Burners
Tax mplications
90
/
Legality
Freedom from
Worry
Collateral
Callability
Amount needed
Protection from
Creditors
Liquidity
Diversification
Yield
Security
Bonds
Utilitarian nvestments
Mutual Funds Stock
Real Estate
SECTION THREE
CAPITAL
ACCUMULATION
9
Meet
"Sydl P. TaccIl" is a mnemonic useIul Ior analyzing investment pro-
posals.
In this chapter. we will proceed to discuss the relevance to your
particular situation oI each investment Ieature signiIied by the letters
comprising "Sydl P. TaccIl's" name.
SECURITY.
HOW SECURE IS THIS INVESTMENT?
All oI us would like to be able to get our money back in case
something goes wrong in an investment. This is another area where
you must allocate risk. (You should be getting to be an expert at risk
allocation!) Depending on your age. temperament and goals. you
must be able to look at an investment and decide iI it Iits within the
parameters oI your personal "acceptable risk" situation.
II accumulating dollars quickly is your main motivation. then oI
course your risk tolerance will be higher than someone older.
perhaps with more responsibility. who neither wants to nor can aI-
Iord to lose what he already has acquired. Each person looks at a
potential investment Irom his own unique perspective and with diI-
Ierent expectations. Promises are seldom guaranteed and expecta-
93
tions may be disappointed. Can you accept the promise oI higher in-
terest Irom a corporate bond versus the increased saIety but lower
yield oI a government backed bond? What iI the corporate bond
(bond issued by a private company) can't keep its promises to pay in-
terest when due and principal at maturity?
Or suppose you are considering investing in the stock market.
Will the stock go up as you anticipate and will the company continue
to make dividend payments as large or larger than in the past? The
management and perIormance oI the subiect company is important.
but it is not the whole story. ProIits are dependent on a combination
oI many things; the economy. world-wide as well as national. the
overall health oI all companies engaged in the same sort oI activity as
the one you chose; strikes; possible shortages oI raw materials
because oI wars somewhere in the world; newly enacted legislation;
higher interest rates; inIlation. all can have unanticipated eIIects on
your stock.
A problem you will encounter in your security analysis is that
oIten low Iinancial risk goes hand in hand with high money rate risk.
For instance. a bond issued by a Iinancially sound company because
oI its high degree oI saIety pays only moderate to low interest rates;
its saIety is what attracts investors. However. when interest rates
rise. these bonds. with their comparably low returns. decline in value
in the market place. II you should need your money in an emergency
you would have to take a discount on the bond; possibly less than
what you originally paid and certainly less than you anticipated
receiving had you been able to hold it to maturity. Because high in-
terest rates intervened. your "secure" investment became a loser!
This will be more thoroughly explained in Chapter 13BONDS.
YIELD OR RATE OF RETURN
This section is entitled "Capital Accumulation." Capital accumula-
tion could be deIined in numerous ways but I choose to deIine it as
the maximum return on an investment consistent with your already
deIined goals. Yield really determines iust how much capital you can
accumulate over a period oI years.
The "current yield" oI an investment is the amount oI income it
94
yields annually compared to its current market value. The income
may be in the Iorm oI rents. dividends. interest. appreciation (capital
gains) or a combination oI these.
For example: a rental property that has a market value oI
$100.000 and brings in rents oI $10.000/year has a current yield oI
10. II the property was purchased Ior $100.000 and sold at the end
oI one year Ior $110.000. at the end oI that year there would be. in
addition to the 10 yield Irom rental income. a 10 capital gains
also. OI course. this simplistic example assumes an all cash transac-
tion which is indeed a Iairy tale world. In reality. the investment
might have been made with $20.000 down payment. $80.000 mort-
gage and an additional expenditure oI $15.000 Ior mortgage
payments and a property "Iace liIt." In such a situation you'd have
$120.000 on the plus side. consisting oI the new property value oI
$110.000 and $10.000 rental income. The minus side would total
$35.000 including the down payment. Iace liIt and a Iew mortgage
payments. $120.000 subtract $35.000 equals $85.000. more than
enough to take care oI the mortgage. The mortgage is still $80.000
because payments were "interest only" meaning no reduction oI the
principal took place. In this situation you would have made $5.000
on a $35.000 investment which works out to a 14 yield (not taking
into consideration things like interest. depreciation and taxes which
would increase your actual yield).
It should be noted. however. that the property would have had
to be kept at least a year and a day in order to be eligible Ior the lower
capital gains tax treatment which is deIinitely worth postponing the
sale Ior. Instead oI being taxed on the entire $5.000 you made on this
one investment. you would be taxed on only $2.000 which amounts
to 40 oI the whole gain.
A more detailed discussion oI capital gains and aIter-tax yields
can be Iound in Section FiveTaxation. In the chapters in this sec-
tion dealing with stocks and bonds we will discuss coupon rates and
yields to maturity.
95
DIVERSIFICATION: HOW IMPORTANT IS IT?
Invariably Iinancial planners urge you to diversiIy. Long beIore you
ever heard oI a Iinancial planner you probably heard the old adage
and have perhaps repeated it yourselI: "Never put all your eggs in
one basket." Andrew Carnegie. the colorIul oil tycoon at the turn oI
the century. gave the opposite advice: "Put all your eggs in one
basket then watch them like a hawk!" His idea was you could never
become rich unless you concentrated your powers; your eIIort.
knowledge and dollars. A loose modern translation oI his
philosophy might be. "Go for it''"
I would agree with Mr. Carnegie that diversiIication is a deIen-
sive tactica hedgeand not a way to get rich quickly. On the
other hand. getting rich quickly is not the investment goal oI most
people. Many preIer a slower. steadier build-up oI assets. To concen-
trate investments in one area. you must be prepared Ior possible
large losses. Great gains are the reward oI great risks. II you have
determined you can aIIord to and want to assume those risks then
diversiIication may not be as important Ior you and you can skim
this discussion.
It is important to remember Andrew Carnegie was a successIul
entrepreneur. not a Iinancial planner. The reasons Ior diversiIication
seem quite obvious and make it unnecessary to go into in great detail.
I'll enumerate brieIly some oI the advantages oI diversiIication.
High interest rates are great Ior new bond issues. hard on old. and
tend to devastate real estate and dampen business expansion. Hard
assets. such as precious metals. art. diamonds and collectibles. re-
spond to bad news by rising in value. whereas the value oI stock
Ialls. Real estate is seen as a hedge against inIlation and as such would
counter the loss oI purchasing power that would occur when dollars
are invested at a Iixed rate oI interest over more than a Iew months.
In uncertain markets. such as we've encountered in the 80s. I
would especially concentrate on diversifving the time when in-
vestments mature. In general. try to keep investment cycles short so
that dollars are not tied up Ior long periods at what may ultimately
prove to be a non-competitive interest rate. Short term investments
are best in a Iluctuating market.
96
Stocks rise in a booming ("bull") market. This expansion. so
beneIicial to stock holders in general. depresses the bond market.
Money is sought by expanding companies in "good times." Too
much demand results in a shortage which pushes interest rates
higher. Bonds bearing lower interest rates than are currently being
oIIered must be discounted. This phenomena was mentioned when
"Security" was discussed earlier. Although neither bonds nor stocks
as a class. are absolutely secure. diversiIication prevents big losses.
As you can see. iI you owned both types oI investments. a "wash"
rather than a "swamp" would occur iI the market Iluctuated sudden-
ly and wildly.
LIQUIDITY
I preIer the deIinition oI liquidity Iound in Sylvia Porter's Monev
Book (which. iI you don't own. you should rush out and buy a copy
immediately. II you only buy one book out oI all the ones I recom-
mend let it be Sylvia Porter's. It is a quick. easy reIerence to almost
everything Iinancial and you will Iind yourselI reIerring to it oIten.)
"LIQUIDITY: Capacity oI the market in a particular security to
absorb a reasonable amount oI buying or selling at reasonably
limited price changes. An "illiquid" market in a security means
you cannot buy or sell with reasonable Ireedom at reasonable
price changes."
A shorter deIinition might be to say that. "Liquidity is cash or cash
equivalents." Up until recently you were penalized Ior keeping
dollars in Savings and Loans and Banks where the rate oI interest
paid was Iar below inIlation rates. Your dollar was "shrinking" even
as it provided a ready emergency Iund Ior you and your Iamily. That
drawback has generally been eliminated with recent legislation
allowing these institutions to oIIer competitive interest rates on the
money deposited with them. Rates and regulations concerning
withdrawal penalties vary Irom institution to institution so check
these provisions careIully.
Planners used to advise clients to keep anywhere Irom three to six
months' wages on hand Ior emergencies. An argument against this
practice is that it is iust plain "stupid" to have money lying around
97
not working Ior you. It should be gathering interest. expanding and
perpetuating itselI. AIter all. how many times does an emergency oc-
cur that cannot be handled without cash? Now. as I pointed out. the
question is almost moot. because the interest banks currently pay is
comparable to that paid by many less liquid investments. Presently.
the key seems to be whatever makes you Ieel comIortable is the
amount you should keep in liquid assets. Liquid assets commonly in-
clude checking and savings accounts. money market Iunds. U.S.
Government Savings Bonds. brokerage accounts and cash values on
liIe insurance policies.
PROTECTION FROM CREDITORS
Actually there are no investments which. standing alone. would be
beyond the rights oI your creditors should you ever get into Iinancial
diIIiculty. However. you should consider the possibility that a
creditor might at some time in the Iuture have reason to attempt to
try and get at your assets and that possibility should be dealt with
when your purchase oI a new investment is made. The manner in
which you take title to the investment can perhaps shield it Irom
creditors. The whole broad. and oIten overlooked and little
understood. topic I am reIerring to is trusts. Very little use is made oI
trusts by the general public. They are unIortunately and erroneously
seen as being the domain oI the super rich. Actually a trust may be
very simple or quite complex depending on your wishes. It is merely
an agreement whereby you give property to a third party (trustee)
who is expected to manage and invest it Ior your beneIit or the
beneIit oI whomever you choose (beneIiciaries). The property is not
owned by you. it is owned by the trust. with the trustee being liable
Ior debts against the trust as a separate entity distinct Irom you per-
sonally. I would advise you to look into the use oI trusts in your
overall estate planning. They have a variety oI uses which I will go
into in greater detail in Chapter 23.
Just in passing I might mention that spendthriIt clauses. which
may be put into liIe insurance settlement options. also are used to
protect investments Irom creditors. The laws vary Irom state to
state. Usually an installment option must be chosen and only the
98
proceeds held by the insurance company are protected Irom the
claims oI the creditors. In other words. the creditors can only get at
the proceeds aIter they are distributed to the debtor (out oI the in-
surer's control).
TAX IMPLICATIONS
Since an entire section oI this book is devoted to the role taxes play in
your Iinancial planning. I will be brieI here.
You should be aware that some investments are tax Iree. others
are tax deIerred and still others taxed at capital gains rates.
ThereIore. in comparing yields. do not Iall into the trap oI compar-
ing "apples and oranges"; i.e. equating a 9 return Irom a tax-Iree
bond with a 9 return Irom one that is taxed at ordinary income
rates.
I like to think oI "Tax Implications" as being analogous to the
"Magic Wand" that transIormed a plain pumpkin into Cinderella's
Coach. These almost magical investments are called Tax Shelters.
Their glamour is not so much in the return they promise but in their
ability to shield other dollars Irom the tax collector. They accomplish
this Ieat by the use oI depreciation. other deductions and various
credits which will be discussed more thoroughly in Section Five.
AMOUNT NEEDED
It is obvious that you cannot choose any investment you like solely
in terms oI saIety. yield. diversiIication. liquidity and tax implica-
tions. You are restricted to the amount available to you Ior invest-
ment as well as the demands oI the investment.
OI course. "available to you" does not necessarily mean iust what
is squeezed out oI the Iamily budget at the end oI the month. You've
heard: "Where there's a will there's a way." II you discover a bargain
investment it is not only possible but probable you can "Iind" the
dollars needed. A commercial or private lender could be convinced
to put up the required capital and split the potential proIits with you.
I recognize that people are not comIortable with "aggressive in-
vestments." II you have the temperament. interest and the goal oI
99
becoming "wealthy" rather than iust secure. then the amount needed
should not curtail your investment possibilities but only be viewed as
another piece oI inIormation in your overall analysis. Always
remember you can do whatever you truly want to do! There are
many excellent books to help and inspire you listed at the end oI this
chapter and at the end oI Section One.
COLLATERAL
Collateral is anything oI value that you oIIer to a lender Ior security
Ior a loan. II you are unable to pay back the loan Ior any reason he
can liquidate the collateral. He would be entitled to cash proceeds up
to the amount oI the loan and you would be entitled to any amount
remaining above that Iigure. Not all types oI investments can serve
as collateral Ior a loan. Some oI the best collateral are savings ac-
counts. cash value oI liIe insurance policies. good quality securities.
equity in home or automobile and other improved property. These
are all things you don't want to liquidate either because you are cur-
rently enioying their use or getting good returns which you don't
want to give up in a sale in order to go into another investment.
Usually when you oIIer collateral Ior a loan it is a case oI wanting to
have your cake and eat it. too. and it is possible in the world oI
Iinance! You don't want to take out the cash you have in savings and
perhaps suIIer a penalty and give up the interest it is making but you
do want to purchase something else. Because you have the power to
pay Ior it (iI you wanted to) as evidenced by the collateral. you are
given the money to do so (loan). What's that old saying: "Them that
has gets." or the talk about "the only time you can be certain oI get-
ting a loan is when you don't need one."
Highly speculative investments do not make good collateral. It is
not uncommon when shares oI a volatile company are pledged Ior a
loan and the stock market dips too Iar to Iind the lender Iorcing the
shareholder to sell at an unIavorable price in order to keep his loan
out oI ieopardy. The same thing happened to people who had gold as
collateral Ior loans. When the gold market collapsed Irom highs oI
800. many people were Iorced to sell at a loss to cover their outstand-
ing loans. Where you. as an investor. might choose to "ride out" a
100
bad market hoping Ior the value to return. a lender will not allow
you to do so.
Whether or not an investment is suitable as collateral is only one
more piece oI inIormation to evaluate when considering what type oI
investments you want to own. As you can imagine it only has
relevance when almost everything else is equal.
CALLABILITY
When buying stocks and bonds check to see iI there is a call provi-
sion; iI so you might want to shy away Irom this oIIering. A call pro-
vision is the right the issuing company reserves to pay oII obligations
beIore maturity; generally subiect to enumerated conditions.
When you look at the money you have beIore you to invest
(Iorget Ior the time being any talk about promoting bargain in-
vestments) and divide it up to achieve your goals aIter some very
careIul and time-consuming thought. you don't want to have your
plans upset by a company redeeming your stocks or bonds when it
suits them and not you!
Many corporate bonds and most issues oI preIerred stock are
callable. Companies naturally would like to redeem their obligations
when interest rates decline below the level at which they were sold.
The idea is to replace them with new issues bearing lower rates. Your
desire is to keep the higher return which is probably the reason you
were attracted to the issue in the Iirst place. So you will not Iind
yourselI at cross purposes with a corporation you should check
careIully when considering the purchase to see iI there is some pro-
tection against a call Ior at least a certain period oI time and with a
limit to the price at which it may be called.
FREEDOM FROM WORRY
You almost subconsciously take your own temperament and at-
titudes into consideration when choosing an investment vehicle. I
want you to do it consciously! The worksheets in Section One should
have made you more aware oI your strengths and weaknesses;
whether you are a risk taker or need security; whether you would
101
preIer to take an active or passive role in your investments; whether
your goal is to be a millionaire or iust to live comIortably. Now is the
time to be cognizant oI all these things and eliminate some invest-
ment possibilities Irom your consideration.
Freedom Irom worry means diIIerent things to diIIerent people.
Some people Iind they are. and preIer to remain so wrapped up in
their careers that they don't have time to bother with investment
decisions. For them. mutual Iunds might be a natural selection.
Other people Iind they get very nervous iI they are even a little bit in
debtthey should deIinitely stay away Irom aggressive investments
where they may be liable Ior large amounts oI money (tied up) at cer-
tain times during a transaction. Maybe you can't stand the "ups and
down" oI the stock market; on the other hand perhaps your iob is
rather dull and excitement. like the roller coaster thrills investors
sometimes experience Irom the stockmarket may be exactly what
you crave! II you are good with your hands and like to design things.
enioy working with people and love to speculate. buying rundown
properties. Iixing and renting them may be your perIect investment
vehicle. However. iI you preIer to take a passive role don't rule real
estate out because you can still share in the Iever oI speculation
without investing time or labor. Contributing investment dollars as a
limited partner might be something you should look into.
Bernard Baruch once said in reIerence to the stock market. but it
holds good Ior anyone trying to Iind his own particular investment
threshold. "Sell until you can sleep at night." You may be sorry iI
you Iail to hold your potential investment up to the scrutiny oI this
Ieature oI SYDL P. TACCFL!
LEGALITY
We can all think oI 100 ways to get rich quickbut are they legal? In
most cases. the answer is obvious! This Ieature is included here to re-
mind you to check very careIully before proceeding in those cases
that are not so obvious; the gray borderline investments that sound
too good to be true iust may not be honest! II you have your suspi-
cions don't let greed make you throw discretion to the wind. A new
102
scheme is born every minute; and a sucker to go with it. Tax shelters
are especially vulnerable. Also the many ways to keep your money
Iree Irom taxes by using oIIshore trusts need special scrutiny. Many
people who "get caught" are not crooks. they're iust gullible and
want to believe in the good Iairy! Don't neglect this all important
area when analyzing your potential investments.
103
WORKSHEETCHAPTER NINE
POTENTIAL INVESTMENT ANALYZER
List any investments you are considering and circle the 3 if there is nothing in particular to
distinguish it from all other investments. n other words, let the 3 stand for average so that 1 becomes
a strong negative aspect of that investment and 5 the strongest positive.
Use your own notebook.
1
0
4
nvestment
S Y D
security yield diversity
L
liquidity
P
protect
creditors
T
taxes
A C C F
amount
needed collateral call? freedom
L
legal?
(example)
U.S. Savings
Bond
1 2 3 4 1@3 4 5 1 24 5 1 2 3(4)5 1 2(3)4 5 1 2 3(4)5 1 2 3 42 3 4 5 123 4 123 4 1 24 5
Tax-free
Municipal
Bond
1 2 35 1 24 5 1 24 5 1 2(3)4 5 1 24 5 123 4 1 24 5 2 3 4 5 1234 1 24 5 1 2(5)4 5
Real
Property
1(2)3 4 5 1 2 3 4 1 2(3)4 5 1(2)3 4 5 1(2)3 4 5 1 2 34(5) 1(2)3 4 5 1 2 34 1 245 2 345 1 2(5)4 5
RECOMMENDED READING
CHAPTER NINE
Complete Monev Market Guide. by William Donoghue
The Smart Investors Guide to the Monev Market. by Paul SarnoII
Your Book of Financial Planning. edited by Loren Dunton
The Intelligent Investor. by Beniamin Graham
How to Live with Your Investments. by Linhart Stearns
How to Read the Financial News. by Norman Stabler
Financial Planning Handbook. by Harold Gourgues
Personal Financial Planning. by Hallman & Rosenbloom
Institutional Investing. by Claude Ellis
Papermonev and Supermonev. by Adam Smith
The Battle for Financial Securitv. by Roger Birdwell
The Alpha Strategv. by John Pugsley
Is Inflation Ending? Are You Readv? by A. Gary Shilling and Kiril
SokoloII
Wealth Magazine
The Personal Guide to Investment Planning
4425 W. Napoleon Avenue
Metairie. LA 7001
105
10
Common
Stock
COMMON STOCK
Common stock is tangible evidence oI an equity ownership in a com-
pany. A stockholder shares in the successes and risks oI an enter-
prise. When a company is not doing well. the price oI the stock
declines. When the company is making a proIit. each share increases
in value; i.e.. the price oI the stock goes up. Usually part oI a com-
pany's earnings are distributed to the stockholders in the Iorm oI
dividends. the remainder is used Ior business expenses and expan-
sion. The amount to be distributed and when. are decisions made by
the board oI directors elected by the shareholders.
HOW TO DETERMINE THE WORTH
OF A PARTICULAR STOCK
The price oI one share oI a particular stock which is traded on the
New York or American Stock Exchange (and these are really the only
stocks a novice should concern himselI with) is quoted in the Iinan-
cial sections oI most local newspapers.
To Iind the "worth" oI a stock takes a little more eIIort! Com-
panies send annual reports to each stockholder. Almost halI oI these
"owners" throw the reports away without even opening them.
107
Dont' The Annual Report is the key to determining the current
health and direction your company is headed. Look at the ten year
summary; have earnings been increasing or decreasing? How much
has been invested in upgrading. inventory and new innovations?
These answers will help determine your company's potential Ior
Iuture proIits.
The market price oI a conservative stock tends to keep pace with
its earnings per share. The earnings per share are computed by sub-
tracting any preIerred dividends Irom the company's net proIits and
dividing the remainder by the number oI shares outstanding. The
earnings per share is useIul by itselI and also necessary to compute
the price earnings ratio (P/E).
The P/E ratio oI a stock is the market price divided by the most
recent per share earnings. II the Widget Company sold Ior $50/share
and its per share earnings were $5. its P/E ratio would be 10. (50
divided by 5) That means it takes $10 oI market value to purchase $5
oI earnings!
There are two other commonly used indicators oI a stock's
worth. One is the "yield" meaning the percentage that the dividend
bears to the market price oI the stock. For example. getting back to
the Widget Company. whose stock is selling at $50/share and pays a
dividend oI $3 on each share. the yield is 6. (3 divided by 50) For
the yield to have any meaning to you. you would have to know the
normal yield in the industry and not only how the Widget
Company's yield compared to similar companies but also to its own
record over the years.
The "book value" is also an indication oI a stock's worth. The
book value has nothing to do with market value. It is simply a com-
pany's net worth (assets minus liabilities) minus the liquidating value
oI any preIerred stock. To Iind the book value per share iust divide
by the number oI outstanding common shares. This does not tell you
much about the potential oI a company; it really says nothing about
the proiected earnings or expectations oI the company Ior the Iuture.
What book value does do. is tell you the liquidating price. It estab-
lishes the bottom line. A company. even with a poor earnings poten-
tial. would not anticipate its stock Ialling below book value.
108
STOCK SPLIT
When the price oI a stock gets too high a company oIten divides the
number oI outstanding shares. In a two Ior one split a stockholder
with 100 shares at $80/share will now own 200 shares at $40/share.
The hope is that more investors will be encouraged to buy the lower
priced oIIering. You can see the stockholders value is not increased
by the split. as such (100 times 80 and 200 times 40 both $8.000)
but increased activity may drive the price up. Psychologically it
looks like a better deal to buy at the lower price. Who would you say
is getting the better deal. the guy who buys a double ice cream cone
Ior $1.00 or two singles Ior 50* each? It might depend on whether he
has two hungry kindergartners or is a teenager with a load oI books.
You can see. however. the market value oI the ice cream is the same.
KINDS OF COMMON STOCK
SPECULATIVE
In a sense all stock is speculative because the proIit is unknown; not
"built in" like it is with bonds. You know iI you buy a bond at a cer-
tain price and hold it Ior a certain period oI time (maturity) you will
have X dollars; that is iI the corporation is still in existence and Iinan-
cially sound when the time comes to redeem it. The only thing that is
really uncertain (speculative) about a bond is the price you can buy
or sell it Ior before maturity. This unknown price is reIerred to as the
discount (iI lower) or premium (iI higher) bond price. As the term is
used in reIerence to the market. speculative stocks are new issues.
glamour stocks. penny stocks or any stock usually low priced
because it is unproven. These stocks oIten rise and Iall in price quick-
ly and drastically as compared to the rest oI the market.
GROWTH STOCK
Growth stock usually appears to be expanding its proIits ahead oI the
market and general economy. The P/E ratio may be smaller than
that oI the purely speculative stocks but it is greater than the more
conservative. Growth stock may be the proper investment vehicle
Ior people looking Ior relatively Iast capital accumulation but who
109
are not willing to accept as much risk as demanded by the more
speculative issues. As is true oI speculative stock. the price here is an
anticipation oI Iuture proIits rather than an indication oI current
earnings.
CONSERVATIVE STOCK
The stocks with the longest history oI weathering the market's ups
and downs and paying dividends through it all. are called "blue
chips." Blue chip companies are usually old. established Iirms with
records showing consistent. though not necessarily spectacular.
proIits over the years. Dependability and income Irom dividends are
characteristics oI these stocks. Their P/E ratio is more conservative
than that oI the speculative and growth stocks. The earnings tend to
iustiIy the price. This is the ultimate in saIety Ior those who desire
stock in their investment portIolios.
CYCLICAL AND DEFENSIVE STOCK
Certain companies are dependent on the business cycle to a much
greater degree than others. Because they are manipulated by Iorces
economic and political. beyond the control oI the company. the
stock tends to Iluctuate wildly. Examples oI cyclical stock that a Iew
years ago suIIered devastating declines are the aerospace and auto in-
dustry issues. On the other hand there are the so-called deIensive
stocks which Iluctuate very little. Usually these stable companies
provide necessities oI liIe such as Iood and utilities.
OVERLAP
It is not surprising that a blue chip or deIensive stock can also be con-
sidered a growth stock or income stock. A stock that starts out
speculative (as most do) can wind up a Iew years later qualiIying Ior
the growth or conservative category. II it continues in existence long
enough. showing consistent proIits and dividends. it may wind up a
blue chip! UnIortunately the opposite can also occur. GM Ior years
was considered a blue chip company but in the 80s it would be more
realistically classiIied as a cyclical stock.
110
HOW TO BUY STOCK
DOLLAR COST AVERAGING
Dollar cost averaging might be called "time diversiIication." It is a
plan whereby you. as an investor. commit yourselI to investing a
speciIied amount oI money at regular intervals over a long period oI
time without regard to the short term swings oI the market. For ex-
ample iI you put $50/month into the Widget Companv over ten
years. you would Iind some months your $50 would buy more stock
(lower priced) than others (higher priced). At the end oI ten years
you would have acquired a large chunk oI Widget Stock at a very
good price.
Remember this is not a IoolprooI way to buy stock. The Widget
Companv may not iustiIy the Iaith (and dollars) you put into it. Its
market price. which under this system you try so hard to ignore on a
day-to-day basis. could conceivably be on a one way track; down
only!
Just as unlikely but still to be considered is the Iact that. due to
some emergency. you might have to sell when the market is at a low.
The whole purpose oI this book is to help you avoid such a possibili-
ty. II you have read this Iar you would not Iind yourselI in such a
precarious situation because you would have adequate insurance Ior
such an emergency situation. other liquid assets and would not be us-
ing dollars you could not aIIord to lose in the Iirst place!
EMPLOYEE SAVINGS PLANS
A relatively painless way to practice dollar cost averaging is through
an employee savings plan. II there is one where you work you may
Iind your employer will put up either a matching sum or other
amount Ior each dollar oI your wages you set aside Ior investment.
The investment money is automatically deducted Irom your
paycheck. Together with the employer's contribution it is put in a
trust Iund set up Ior this purpose. Sometimes the savings are used to
purchase the stock oI your employer's company but more oIten they
are invested in several stocks (mutual Iunds) and proIessionally
managed.
II you have the option oI reinvesting your dividends I would
111
recommend you do so. You will get compounding not only on in-
terest over the years but will have another way to acquire additional
shares. Sometimes iI a bank is involved. there is a small Iee. II the
reinvestment program is handled within your company there is
usually no charge involved. Check with your employer to see iI you
qualiIy and to get the details on the plans available to you.
INVESTMENT CLUBS
Social investment clubs were around beIore the turn oI the century.
In 1951 they were Iormally launched with an education obiective.
The address oI the National Association oI Investment Clubs is listed
at the end oI this chapter. They provide instructional material and
aids at a nominal cost Ior those people serious about accumulating
capital in a conservative. supportive environment. II you want to
"do it yourselI" (investing) be sure to write Ior their handbook.
INVESTMENT COUNSELORS AND BROKERAGE HOUSES
Many people open individual accounts with a brokerage house. II
you are a novice it is best to choose one oI the larger Iamous houses
with a sound reputation. Choose your individual broker as you
would your doctor. auto mechanic or attorney. Find one whose ex-
pertise is in your area oI interest. You don't want a broker whose
specialty is venture capital when you are looking Ior income stock. It
helps iI his philosophy is similar to yours and that you Ieel comIor-
table with him. Most advisors would suggest you trust his iudgment
also.This is essential iI you intend to give him discretion over your
portIolio (i.e. all yo"*- investment holdings) via a limited power oI at-
torney. A limited p v`er oI attorney would allow the counselor to do
certain speciIied things on your behalI. You in eIIect give your per-
mission Ior him to buy and sell. using his own iudgment as to price.
time and amounts. all within whatever limits you choose to set. You
would in such a case. be hiring an investment counselor. who Ior a Iee
(usually a percentage oI your account. paid annually). would treat
your investments as iI they were his own. II you proIit overall he will
too; remember his is a percentage Iee. However. it is hard Ior me to
advise anyone to go this route because it is obvious who will lose the
most iI he mishandles your account! I think anyone who would want
112
to put his investments blindly into the hands oI another would not be
reading this book so probably a caution is not necessary. II I am
wrong and there is a reader out there thinking oI hiring a discre-
tionary investment advisor. I cannot overemphasize how important
it is to get as many reIerences as possible both Irom Iinancial institu-
tions and clients oI the proposed advisor. Make certain he has ade-
quate liability insurance and an impeccable reputation. Brokerage
commissions are paid in addition to his advisory Iee and usually to
your own or another broker (oI the advisor's choosing).
II you are planning to act as your own counselor and only intend
to pay a broker's commission on the orders executed at vour direc-
tion. then trust is not quite so important and may even lull you into a
lazy dependency once you develop it! Many brokers are quite
knowledgeable and should be relied on Ior advice but usually in
answer to speciIic questions. These houses Iigure a certain amount oI
counseling into their brokerage Iees. There are discount houses
which charge smaller Iees but do not make recommendations or
otherwise advise you regarding a transaction; their only Iunction is
to execute your orders. Again a word oI caution: only the most
knowledgeable and sophisticated investors would beneIit Irom the
savings. The advice you as a novice could otherwise receive Irom a
broker is worth Iar more than any savings you might imagine you
would realize by using a discount house. As you will discover in
chapter twelve. I think mutual Iunds are the ideal solution; a happy
medium to this problem. Besides paying less Ior advice than you
would pay a discretionary counselor. you are Iree to accept or reiect
it according to your own iudgment.
WHEN TO SELL
The most obvious reason Ior selling your stock is the need Ior
money.
Another happier reason Ior selling is the desire to take a proIit be-
Iore the stock takes a downward slip and wipes the proIit out.
A third reason is to get out oI a bad deal. Maybe your stock is go-
ing down or has stood still over too long a period oI time.
A Iinal reason to sell is to make what you hope will be a proIit-
113
able switch. Perhaps you see a chance to get a higher return on your
investment dollar by selling the current stock and investing
elsewhere.
One word oI caution: in all instances it will be to your advantage
to have held the stock at least one year beIore selling. That way you
are taxed at capital gain rates. We will discuss capital gains more
thoroughly in Section Five. but roughly it means you will be taxed on
only 40 oI any income resulting Irom investments held more than a
year.
INDIVIDUAL INVESTORS INCENTIVE ACT
H.R.63 was introduced to Congress by Representative Richard
Schulze oI Pennsylvania in 1983. BrieIly the Act allows Ior a 10 tax
credit. up to $1.000 Ior individuals and $2.000 Ior couples. Ior the
purchase oI stocks. bonds and mutual Iunds that invest in American
corporations. II passed it will make stock ownership more attractive
to thousands oI Americans and will thereby provide needed capital
to industry and small businesses. New capital means modernization.
innovations and iobs. However. the nation's huge budget deIicit has
made it extremely diIIicult Ior any legislation proposing either an in-
crease in Iunding or. as in this case. a restriction on revenue. to gain
acceptance by Congress. This appears to be a very unIortunate and
shortsighted attitude because modernization and new iobs means
more revenue Ior the government.
SUMMARY
Try and buy the strongest stocks in the strongest groups. Choosing
the best group oI stocks to invest in at any given time is harder and
inIinitely more important than choosing the highest Ilyer in that
group. Do not enter the market at all unless you can take losses in
your stride. A certain amount oI losses are certain to occur. It is hard
to Iind the right point between diversiIication and concentration.
Too little diversiIication is risky but too much prevents your making
any meaningIul proIits because iI you hit a real winner you will have
so little invested it won't do much Ior you.
114
George Santayana said. "Those who cannot remember the past
are condemned to repeat it." History is really a preIace oI what is to
come. That's why it is so important to study the history oI an in-
dustry and the past record oI a corporation beIore you invest your
money. From this study a well-considered expectation oI the Iuture
should emerge and that in the end should determine your investment
decisions.
Again I draw your attention to the worksheet and recommended
reading list at the end oI this chapter.
115
WORKSHEETCHAPTER TEN
COMMON STOCK
ARE STOCKS
A PROPER INVESTMENT MEDIA FOR YOU?
1. Can you accept risk? Financially? Emotionally?
2. What is your specific investment goal? Check one.
____long term growth?
____current income?
____security of principal?
____other?
3. Do you have time to inform yourself about a company?
4. Have you checked your broker's references even if he is a
member of a well-known large and reputable firm?
5. Have you investigated dollar cost averaging?
6. Do you have the courage to cut your losses short and not
keep hoping for an "upturn" in the market?
7. Do you have an overall plan for investing and can you stick
to it?
8. Do you have the patience to wait for a stock to move, not
expecting too much too soon?
9. Do you have the discipline to refuse to act on rumor or a
"hot tip"?
116
WORKSHEETCHAPTER TEN
COMMON STOCK
ANALYZING A PARTICULAR STOCK
1. What is the P/E ratio of this stock?
2. s it higher or lower than the P/E of its competitors?
3. How is this company ranked compared to the industry as
a whole? Which rangeTOPMDDLE-BOTTOM-?
4. s this an improvement, decline or the same as one year
ago? Five years ago?
5. What do you know about the present management?
6. s the company diversified or is it dependent on only one
product or service for its profits?
7. s the company in a growth industry?
8. How great and how consistent is the demand for the com-
pany's service or product?
9. How will new technology affect this industry?
10. s the overall industry stable or subject to roller coaster
type movements?
11. s the industry dependent on imported raw materials or
labor?
12. How are labor relations within this particular industry?
Have you considered the likelihood of strikes?
117
13. Has there been recent upgrading in the company in
terms of plant, inventory or other innovations?
14. What is the book value of this company?
15. s this year's yield better than in former years? s the
yield of this company normal for the industry?
16. Would you classify this stock as GROWTH? SPECULA-
TVE? BLUE CHP? CYCLCAL? CONSERVATVE?
DEFENSVE?
118
RECOMMENDED READING
CHAPTER TEN
Stock Market Primer. by Claude Rosenberg. Jr.
Investing on Your Own. by Richard Thorsell
How to Make $1.000.000 in the Stock Market Automaticallv. by
Robert Lichello
Realitv in the Stock Market. by Roger Birdwell
Odds-On Investing. by Brody & Bliss
Heads You Win. Tails You Win. by Ray Dirks
Get Rich on the Obvious. by Tom Taylor
How I Made $2.000.000 in the Stock Market. by Nicholas Darvas
How to Profit from the Coming Bull Market. by Max Ansbacher
How to Make Monev in Wall Street. by Louis Rukeyser
The Dowbeaters. How to Buv Stocks That Go Up. by Gobleigh &
DorImart
Dow 3000. by Thomas Blamer & Richard Shulman
Jaluing Common Stock. by Georg Lasry
The Dow-Jones Irwin Guide to Common Stocks. by Moder & Hagin
How to Select Undervalued Stocks. by Robert & Darryl Peisner
How to Select Rapid Growth Stocks. by Robert Peisner
The Stock Market. Theories & Evidence. by Lorie & Hamilton
The Stock Market Handbook. edited by Zarb & Kerekes
For inIormation on investment clubs write:
National Association oI Investment Clubs
1515 E. Eleven Mile Road
Royal Oak. MI 48067
Phone: 313-543-0612
119
22
Bonds
BONDS
A bond is a promise to pay interest at a Iixed rate (coupon rate) and
to redeem the promise at a predetermined time Ior more money than
the consumer paid when he Iirst bought it. Because there is no uncer-
tainty as to the amount oI interest income one might expect Irom a
bond and the redemption price is set beIore the initial purchase. a
bond is reIerred to as a Iixed income investment. As was mentioned
brieIly in the last chapter. the main risk as to what your bond will be
worth at maturity or what income you can expect Irom it has to do
with the Iinancial stability oI the issuing entity. Stocks and bonds
share this uncertainty. The ability oI the issuer oI both to meet its
obligations in the Iuture is unknown and the risk varies Irom one en-
tity to another.
CONTRASTED WITH STOCK
II you buy stock you become an owner and expect to share in the
company proIits. II you buy bonds. however. you become a lender
and expect a Iixed amount oI interest. AIter the second world war
yield on stocks was double that oI bonds. In the 1970s that situation
was reversed. Thanks to compounding high interest rates in-
vestments in bonds oIten doubled in nine or ten years. Compound-
121
ing meant that an investor received interest. not only on the principal
amount invested. or in the case oI bonds. the face value oI the bond.
but interest was paid on the accumulated interest each time also.
Compounding is a bonanza Ior the investor! He receives interest on
his interest. On top oI everything else stocks have recently en-
countered tough competition Irom the bond market because bonds
oIIer greater protection against wild or hostile economic conditions
than do stocks.
YIELD
A yield on stock. iI you recall. was computed by dividing the divi-
dend by the purchase price. Similarly. to determine the yield on
bonds. divide the interest by the price you paid Ior the bond. For ex-
ample: $1.000 bond pays 10 /year and you bought it Ior $900.
Remember. interest is paid on the Iace value; thereIore 10 oI
$1.000 is $100. The yield is 100 divided by 900 or approximately
11. It should be noted that yield to maturity would be higher
because in addition to interest you would receive an extra $100 more
than you paid Ior the bond. Your broker can help you with this com-
putation. or. iI you like. there is a reIerence book (listed in the
reading list at the end oI this chapter) which has the computations
already Iigured Ior you.
BOND RATINGS
All bonds are rated according to the credit worthiness oI the issuing
entity (borrower). The most secure are rated AAA down to AA. to A
and on through BBB and CCC to the most risky grade. C. Along
with yield and market price the rating is oI prime importance when
analyzing a potential investment in the bond market.
CALL PROVISIONS
Another consideration is the presence or absence oI a call provision.
We mentioned "calls" earlier in Chapter Nine. To reiterate: you buy
a bond with the idea oI receiving a Iixed interest income over a period
122
oI time. A call provision allows the issuer to call these bonds should
interest rates decline below the levels at which they were sold and to
replace them with new issues bearing lower rates. There are certain
restrictions such as the price at which the entity reserves the right to
call in its bonds and the time which must elapse beIore a call is per-
mitted. OIten you can get a Iive-year protection against calls which
would in eIIect guarantee the interest rate you "bought" Ior at least
that period oI time. Naturally. look Ior bonds without call provi-
sions whenever possible.
DISTINGUISHING BETWEEN BEARER
AND REGISTERED BONDS
Receiving interest on your bearer bonds is not the automatic opera-
tion you may be used to in your savings account. You must take an
active role in obtaining it. A bearer bond is like cash and should be
treated as such. II you lose it it's "Iinders keepers"; you have less
prooI oI ownership than you do with a travelers check. These bearer
bonds have coupons attached to them which you must clip and
redeem at a bank in order to receive your interest.
Registered bonds have your name on them and are registered
with the issuer who sends you a check when the interest is due. This
makes them not only saIer but more convenient than bearer bonds.
HOW TO BUY BONDS
The Iace value oI a bond is the amount the issuer will pay when the
bond is redeemed at maturity. Bonds are sold at a percentage oI their
Iace value but interest is paid on the whole Iace value. A bond that is
bought at a premium is bought Ior more than its Iace value. You
might wonder why anyone would pay more Ior a bond currently
than what he can get Ior it in the Iuture. The attraction is the interest
rate. A person buying a bond at a premium would be acting on a
belieI that interest will Iall in the Iuture. His aim would be to capture
what he believes to be a high interest rate now.
Underwriters Iunction as wholesalers between the borrowing in-
stitution and the investor (lender). They in eIIect. buy the bond issue
123
Irom the borrowing entity at a certain Iigure and resale it to the in-
dividual investor at a higher price; the underwriters' "mark up."
It is possible to purchase bonds through brokerage houses or
your bank. or even directly Irom the Federal Reserve. There are also
many bond Iunds available which are similar in concept to the stock
oriented mutual Iunds. These bond Iunds are proIessionally manag-
ed and can consist oI a variety or a selection oI only one type oI
bond. The "all government" bond Iunds are popular because oI the
security they oIIer. Frequently bonds are chosen and put into a trust
called a unit investment trust. The trustee. generally an investment
banker or broker. then sells "units" in the trust to investors.
KINDS OF BONDS
There are three main kinds oI bonds each having numerous subclass-
iIication. These are Corporate Bonds. Municipal Bonds and U.S.
Government Bonds.
CORPORATE BONDS
Utilities are the largest issuers oI corporate bonds. Iollowed by
private industry. Iinance companies and real estate organizations.
Mortgage Bonds. Mortgage bonds are bonds secured by a mortgage
on all or a portion oI the Iixed property oI the borrower. Utilities
almost always issue mortgage bonds because the collateral oIIered (a
lien against real assets) is a needed enticement to investors.
Debenture Bonds. Debenture bonds are unsecured. They do not oI-
Ier collateral Ior their loans but only the credit oI the issuing corpora-
tion. That means holders oI debenture bonds are in line to be paid oII
aIter the secured lender (holders oI mortgage bonds Ior instance). As
their name implies. subordinated debentures are subordinated to
senior debt and income debentures are only paid interest iI and when
it is earned. II the company experiences Iinancial diIIiculty the in-
terest may be accumulated slowly but must. at any rate. be paid to
the income debenture bond holders beIore dividends are paid to any
stockholders. Convertible bonds may. at the holder's option. be con-
JLjurJ:
verted to stock; not as saIe as bonds but more speculative and
desirable under certain market conditions.
MUNICIPAL BONDS
Municipal bonds are issued by local and Iederal governments and
secured in several ways. The highest security is oIIered by General
Obligation Bonds. The "Iull Iaith and credit" oI the borrower is hard
to beat when that borrower has general unlimited taxing powers.
Special and Limited Tax Bonds are backed only by a portion oI
that taxing power. OIten the borrower is restricted to paying interest
Irom only one special tax.
Revenue Bonds are paid Irom the proceeds oI the selI-supporting
proiects Ior which they were raised.
Because the Iederal government backs local Housing Bonds these
bonds are among the most secure and are consequently awarded
high ratings.
The most important and best publicized Ieature oI Municipal
Bonds is the Iact that they are exempt Irom Iederal and sometimes
state and local taxation. When compared to the aIter-tax yield oI
other investments. municipal bonds can be quite attractive. We will
discuss them again in Section Five as a vehicle Ior reducing taxes.
GOVERNMENT BONDS
U.S. Savings Bonds. Most oI us are Iamiliar with U.S. Savings
Bonds. They have been a typical birthday or Christmas giIt Irom a
distant Aunt and Uncle. How many 13-year-olds have received sav-
ings bonds Ior their Bar Mitzvahs during the past 40 years? Savings
Bonds are registered so the birthday child's name is placed right on
the security which makes it extra speciall These bonds can not be
"called" beIore maturity and are not transIerable. I am describing E
Bonds. Today Series EE are sold with a Iace-value oI $25 up to
$100.000. The maximum annual purchase allowed an individual is
$10.000. The larger denominations are used to Iund employee sav-
ings plans. EE Bonds don't pay interest as such. but since they are
issued at a discount. the yield you get at maturity or whatever date
you choose to redeem them (redeemable aIter two months) can be
125
compared to interest. OI course the longer you hold the Bond the
better your return.
Savings Bonds cannot be sold in the market place. Since they are
non-transIerable securities. they cannot be used as collateral Ior a
loan but can only be redeemed by the government. There is no state
or local tax on savings bonds and Iederal income tax is deIerred on EE
Bonds but not H Bonds until the bonds are redeemed. This is a useIul
and money saving Ieature which will be discussed in more detail in
Section Five.
Series HH Bonds are sold at their Iace-value and pay interest
twice a year. The lowest denomination is $500 and the maximum
purchase allowed in one year. as in the EE Bonds. is $10.000. You
must hold HH Bonds at least six months aIter the issue date beIore at-
tempting to redeem them.
Treasury Bonds. These are backed by the United States Govern-
ment and they make up most oI the Iederal debt. They can be pur-
chased in bearer or registered Iorm. They are considered long term
debt and generally take ten years to mature. Interest rates naturally
change over a long period oI time. When the rates oIIered in new
issues is higher than what your earlier issued bond is paying the price
oI the earlier bond naturally declines; i.e. iI you were to sell it beIore
maturity. II you hold it until maturity it can be redeemed Ior Iace-
value. However. the higher interest that you could have had Irom
some other investment is still sacriIiced.
OTHER GOVERNMENT SECURITIES
U.S. TREASURY BILLS
U.S. Treasury Bills are sold at a discount and mature in three-six -
nine-and twelve months. They don't pay interest but your "proIit"
(diIIerence between what you paid Ior them and what they were
redeemed Ior.) is comparable to interest. They are issued only in
bearer Iorm with a minimum purchase oI $10.000 required.
TREASURY NOTES
Treasury Notes are securities that pay interest every six months.
126
Their maturity dates range Irom one to ten years. Here also there is a
minimum purchase requirement oI $10.000. You can buy govern-
ment securities through your broker or bank. New issues can be
bought directly Irom the Federal Reserve without service charges or
commission. Because oI the large amounts involved you can see that
this action should be the domain oI the sophisticated. knowledgeable
investor. There are books listed at the end oI the chapter that will
satisIy your curiosity and with some study and continued eIIort
government securities may be the ideal investment Ior you one day.
SUMMARY
Bonds are usually considered a saIer investment. more conservative.
than the stock market. A bond holder is a lender with Iixed interest
income rather than a partial owner Iacing Iuture losses or proIits. But
bonds are not without their pitIalls. There are three main kinds oI
bonds: U.S. Government. Municipal and Corporate. The govern-
ment bonds oIIer the greatest saIety; the municipals are tax-exempt;
and the corporate bonds oIIer the greatest monetary rewards. The
two biggest enemies Iacing the bond market are high inIlation and
high interest rates. It is conceivable that inIlation could rise high
enough to oIIset all growth. Thanks to inIlation. the investor's pur-
chasing power would be the same as the year the investment was
made. During periods oI high interest. prices oI bonds issued during
earlier lower interest years would be depressed. However. this in
itselI would not greatly aIIect the holder who could aIIord to keep
the bond to maturity. On the other hand. those Iorced to sell earlier
would have to suIIer large discounts due to the high interest rates an
investor could get Irom the new bond issues.
127
WORKSHEETCHAPTER ELEVEN
A CHECKLIST FOR THOSE
CONSIDERING THE BOND MARKET
1. Are safety and income your prime objectives?
2. How long do you want to leave your savings in a fixed-
income medium?
3. Can you afford to take risks?
4. What do you think the inflation rate will be in 2 years?
5 years?________ 10 years?________ 20 years?________
5. Will your interest coupons cover any annual loss of pur-
chasing power your invested dollars may suffer if your infla-
tion predications are realized?
6. What do you think interest rates will be in 2 years?
5 years?________ 10 years?________ 20 years?________
7. f your interest rate predictions come true and if they
should depress the bond market, do you have enough other
assets so that you can be certain of holding your bonds to
maturity and not suffer large discounts?
8. Do you have a large enough sum to invest to meet re-
quirements?
9. Have you considered the commission charges on small
"lots"?
10. Are you willing to accept the responsibility for this in-
vestment and obtain the knowledge needed?
128
11. Would you feel more comfortable with your savings in a
bank or other savings institution?
12. Have you computed the "difference" you would achieve
by placing your investment in a savings institution vs. the
bond market on a (1) best situation scenario (2) stay the same
(inflation & interest) and (3) worst scenario?
13. Have you considered a professionally managed bond
fund?
(consult with your banker or broker)
129
RECOMMENDED READING
CHAPTER ELEVEN
Bonds. by Robert Lawrence Holt
The Handbook of the Bond & Monev Markets. by David Darst
The Complete Bond Book. by David Darst
Municipal Bonds. by Lamb & Rappaport
How to Invest in Bonds. by Hugh Sherwood
130
Mutual
Funds
Mutual Funds have been the "darlings" oI the 1980s investment
market. This is understandable when one realizes total assets oI
mutual Iunds tripled in the last Iive years! We have here a classic
"chicken or the egg" type consideration. Are these Iunds popular
because their assets tripled or did their assets triple because there is
something special about mutual Iunds that attracts investors?
HISTORY
Mutual Iunds have been around Ior a long time. The idea oI pooling
resources and hiring one proIessional manager can be traced to
France and England over a hundred years ago. However. the mutual
Iund concept as we know it today was only recognized as a viable in-
vestment alternative in this country aIter World War II.
All mutual Iunds used to invest in common stock. Common
stock did nothing but rise during the heady days oI the 50s and 60s
and so did mutual Iunds. They were selling at up to twenty times
earnings in some instances! The recession oI 1974 took the sails out oI
the investment market in general. but did even more damage to the
mutual Iunds. Many mutual Iunds began investing in more risky and
dramatic holdings and abandoned their Iormer conservative ap-
131
proach. They went through a period oI opprobrium until their
popularity revived in the 1980s.
Stock prices in the 80s bore some relationship to book value.
dividends and earnings once again. The industry initiated oIIerings
oI income and corporate and municipal bond Iunds to go with the
original equity Iunds. However. the biggest seller in the early 1980s
were the money market Iunds. These are short term holdings which
at one point paid over 15 .
The concept oI the "no-load" Iund (no commission or Iee) was
developed. and cost conscious clients rushed Ior the bait. The bait
was an unbeatable combination oI convenience and lower cost. OI-
Ierings were made directly by mail to the consumer. Shares could be
bought and sold (redeemed) by mail. II an investor was able to make
up his mind. choosing Irom all the literature available to him. he
could by-pass the salesman (broker) completely. Statistics showed
mutual Iunds held their own and actually out-perIormed many other
investments. Between 1978-1980. the pension Iunds (more cost con-
scious than ever due to high inIlation rates) iumped in to the Mutual
Fund Market with both Ieet. doubling their investment Irom 1.4
billion to 2.9 billion.
WHY ARE MUTUAL FUNDS SO POPULAR?
It is not surprising that the small individual investor gets poorer in-
Iormation and Iewer breaks than the institutions or wealthy in-
vestors. To sell 50 shares with the same eIIort it would take to sell
50.000 is not eIIicient. Mutual Funds put a change to that. The "little
guy." by pooling his resources with other "little guys." is able to at-
tract the best investment advisors and Iund managers in the industry;
something not one oI them would probably be able to aIIord on his
own. It is the iob oI the Mutual Fund's advisor to evaluate the past by
giving iust the right amount oI credence to the rate oI return that has
been earned by the Iund compared to similar Iunds and the overall
investment market. The Iee Ior this advice is usually the largest ex-
pense a mutual Iund Iaces. The relation this Iee. plus the relatively
minor expenses incurred with regular administrative oIIice routine.
'`ears to the Iunds assets. is reIerred to as the Iund's expense ratio. OI
132
course the lower the expense ratio the better. Usually that is all the
expense (divided up among all the shareholders) there is in a no-load
Iund. In a load Iund there is oIten a 8 to 9 Iee so the return had
better be superior to that oI the no-loads. In the April 1983 issue oI
Monev Magazine. mutual Iunds were ranked and the top "Iamily"
was Jalue Line, a no-load Iundi
Convenience seems to be another reason mutual Iunds have
become so popular. Withdrawals and purchases can be set up on a
monthly routine worry-Iree basis. The Iund redeems shares at the
current NAV (net asset value) with no hassle or discounts. Book-
keeping Ior tax purposes is done by the Iund and sent to the in-
dividual investors. One certiIicate is evidence oI shares in several diI-
Ierent companies; much more convenient than shuIIling the stock
certiIicates oI twenty or thirty companies and trying not to lose any!
However. diversiIication is probably the number one reason in-
vestors Iind mutual Iunds so inviting. You might be invested in
several industries. all diverse with a total oI IiIty to one hundred
stocks spread among them. Remember the more kinds oI stock you
own the less you risk!
KINDS OF MUTUAL FUNDS
OPEN AND CLOSED-END FUNDS
The closed-end Iunds have a Iixed number oI outstanding shares that
are traded on the open market. Usually the issuing company will not
buy back their own shares. The price. as with everything on the
stock market. Iluctuates according to supply and demand. The price
oI a closed-end share bears no direct relationship to its net asset value
(NAV) which is the Iund's assets minus liabilities divided by all
shareholders. the price is pushed up when the demand is high and
drops when the demand eases.
Open-end Iunds are more numerous than closed. The number oI
shares is not Iixed but is "open". The corporation can issue more
shares as the demand arises. An investor buys Irom and sells directly
to the company. Shares are not traded on the open market. The price
is determined by the NAV. discussed above. Most oI the Mutual
133
Funds we'll be discussing are open-end. Open-end Iunds are current-
ly the most popular.
STOCK FUNDS
These Iunds invest in both growth and income stocks. Growth stocks
where the income received is incidental; riskier more aggressive
growth stocks; and income stocks oIIering the highest yields where
growth is secondary are typical oI a diversiIied stock Iund portIolio.
BOND FUNDS
Mutual bond Iunds invest in all or only one or two oI the Iollowing
types oI bonds: U.S. government bonds that are risk Iree but oIIer
lower yields because oI the increased security; top rated corporate
bonds oIIering a high yield but with limited risk; and Iinally the
lower quality corporate bonds with a higher yield and more risk.
BALANCED FUNDS
These Iunds try to achieve a balance in their portIolios between
stocks and bonds. The traditional balance has been two-thirds stocks
and one-third bonds. The income-oriented balanced Iunds attempt
to accumulate more bonds when interest rates are higher than divi-
dend returns and vice versa.
MUNICIPAL BOND FUNDS
These Iunds are popular because their income is tax exempt. In-
vestments here are classiIied according to the length oI time the Iunds
are committed. They can be bought as tax-Iree money markets (very
short term); intermediate or longer term and in the category oI high
yield. lower grade but long term bonds.
TAX-MANAGED FUNDS
Tax-managed Iunds reIers to mutual Iunds emphasizing utilities. The
obiective is to minimize taxes by reinvesting income instead oI pay-
ing taxable dividends. That way. the investors qualiIy Ior long-term
capital gains treatment.
134
SPECIALIZED FUNDS
An investor can purchase mutual Iunds that specialize in one par-
ticular market such as gold and everything to do with that one
precious metal. Other Iunds specialize in chemical or energy com-
panies exclusively or the stocks oI other nations traded on Ioreign ex-
changes. High technology stocks have been a popular specialty. II
you Ieel strongly about a certain industry. chances are you'll Iind a
mutual Iund specializing in it. The point to remember is that diversi-
tv is the name oI the investment game and the more specialized you
become the greater your risks; (and those who like specialized
mutual Iunds would no doubt add; "the greater your rewards!")
DUAL-PURPOSE FUNDS
These Iunds oIIer two kinds oI shares: income and capital. The in-
come shareholder has no need Ior or interest in capital appreciation
and so the capital shareholder gets a double beneIit. Similarly the
capital shareholder is not interested in current income and is happy
to see it go to the income shareholder in trade. These are actually
closed-end investment companies. The Iund is organized Ior a
deIinite period oI time aIter which the income shares are retired at a
Iixed price. All the capital growth would go to the capital
shareholder only at that time. the income shareholder having receiv-
ed all the income exclusively over the years. It is a case oI "double the
pleasure" Ior both types oI investor.
LETTER STOCK AND HEDGE FUNDS
Letter stock Iunds consist oI holdings oI stock Irom companies that
are so new or small that they are not registered with the SEC
(Securities and Exchange Commission). Buyers oI this stock must
sign a "letter" which states that they will keep the stock Ior a speciIied
time beIore reselling it.
Hedge Iunds involve a lot oI "wheeling and dealing" and are men-
tioned together with Letter Stock Funds because neither are prudent
investments Ior the novice. They are both highly speculative mutual
Iunds and are brought to your attention as a warning.
135
VENTURE CAPITAL FUNDS
Venture Capital Funds could really be grouped with the two Iunds
mentioned above. The small non-proIessional investor should be
warned about these Iunds also. They are not registered with the SEC
in some instances and those that are oIten provide the start-up capital
to other companies too new to have been tested. The estimation oI
the new company's ability to stand in the marketplace is leIt wholly
to the discretionary iudgment oI the Venture Capital Fund's
manager. To risk your investment dollars solely on one man's iudg-
ment takes a lot oI courage or stupidity!
FAMILY OF FUNDS
The idea that one investment company can oIIer a variety oI Iunds
with diIIerent obiectives has caught on rapidly in recent years. A
"Family oI Funds" may reIer to separate corporations or a trust or
may be a single corporation with a series oI separate and distinct
portIolios. called. not surprisingly a "series Iund." This makes
"switching" Irom one Iund to another within the Iamily very conve-
nient. For instance you may invest in the Family's stock Iund during
your early years and wish to switch to an income Iund upon retire-
ment. This exchange privilege would allow a person to switch Irom a
growth Iund to a money market in order to protect his Iunds iI he an-
ticipates a market decline or vice versa.
YOUR GOALS COMPARED TO THE
OBJECTIVES OF THE MUTUAL FUND
In analyzing your own situation you should decide the amount oI
risk you are willing and able to take and see iI there is a mutual Iund
with compatible obiectives and policies. The worksheet at the end oI
the chapter is designed to help you do iust that. I would caution you
in examining a Iund's past perIormance. do so "with a grain oI salt."
There is no guarantee that the past will be repeated (despite San-
tayana) and indeed there may oIten be more evidence to show why it
should not be. It could be that this stock has "had its day in the sun"
and now it is another's turn. There are. however. some guidelines to
136
help you understand a Iund's goals. Money market Iunds strive Ior
current income without risk to principal. Bond Iunds emphasize
stable income. whereas growth equity Iunds are best Ior obtaining
capital appreciation. A retired person may preIer a combination:
stock Iund Ior inIlation hedging; bond Iund Ior durable income and a
money market Ior capital preservation.
WHEN SHOULD YOU INVEST?
In general it is never a good idea to invest a very large lump sum all at
one time. It might be advisable to put all the money in a money
market Iund at the beginning though. and exchange within the same
Iamily over a period oI several months. As we discovered earlier.
dollar cost averaging reduces risk. We reIerred to it as time diver-
siIication.
People have tried to iump into stocks when the market is low and
reverse at the high point. It sounds so easy to invest in aggressive
Iunds during runaway markets and switch back to conservative
holdings in trading markets. UnIortunately statistics have shown
that market-timing iust doesn't work overall. The same illusive skill
(luck?) is required to pick the "hot" crap table and "cold" blackiack
dealer in Las Vegas.
SAFEGUARDS
Mutual Funds are regulated by the SEC as are the other investments
we have discussed so Iar in this section. Federal law mandates that
only 5 oI a mutual Iund's assets may be invested in securities oI any
single entity. They may own no more than 10 oI any class oI
securities issued by an individual company. Mutual Iunds are
restricted to the amount they may borrow and must distribute 90
oI their net income to shareholders annually.
SUMMARY
Mutual Iunds are a proven and popular investment vehicle. Many
people with similar obiectives. by pooling their resources are able to
137
participate in a variety oI investments. Such diversiIication. as you
well know by now. always reduces your risk. These investors can
also aIIord better quality (higher priced) management and advice
than they could hope to obtain individually. Mutual Iunds outper-
Iorm other types oI traditional investments due to their well
developed obiectives and the size oI their pooled assets which allows
them to attract top managers. Mutual Iunds provide convenience
and diversiIication. Not only that. the investor receives proIessional
management and custodial administrative and bookkeeping ser-
vices. all at an unbelievable low cost. They are oIten the ideal invest-
ment Ior a person who doesn't want to take time Irom his proIession
or business to handle investments.
138
WORKSHEETCHAPTER TWELVE
CHOOSING A MUTUAL FUND
1. What do you want this fund to accomplish?
forced savings?_________
college tuition for the kids?__________
retirement fund?_________
current income?_________
other?________
2. What size is this fund? _______________________________
(remember large size might be good for stability but a
smaller fund will achieve large capital gains)
3. How diversified are its holdings? ______________________
(Often diversification = less risk but less diversification
can more easily result in spectacular performance up and
down!)
4. What are the objectives and investment policies of this
mutual fund?
5. Analyze this Mutual Fund's Assets
a) Number of different companies
b) Size of companies
c) Primary fields of investment
d) Emphasis on investments in each of these fields.
e) Balance between seasoned and unseasoned
holdings.
f) Proportion of bonds, preferred stock and cash.
6. Are you prepared to invest regularly and long term? Mutual
Funds are not the proper vehicle for short term speculation.
139
7. What do you know about the management of this Mutual
Fund?
8. f you compare Fund A with Fund B do you know the
period of time these investment records cover? What was the
market environment? Was one Fund able to benefit because
of spectacular growth-issues in a run-away bull market?
9. Have you checked the long term record before investing in
this particular Mutual Fund? 10 years minimum.
10. Can this Mutual Fund hold its own in a bear (down turn)
market?
11. s this the best place for your investment dollars?
RECOMMENDED READING
CHAPTER TWELVE
Dow-Jones Irwin Guide to Mutual Funds. by Rugg & Hale
Gaining on the Market. by Charles J. Rolo
Monev. by Michael Hayes
The Monev Game. by Adam Smith
Competing for Stock Market Profits. by Paul F. Jessup
To quickly get investment inIormation about a particular company
you can oIten obtain toll Iree numbers by calling inIormation and
stating the name oI the company.
800-555-1212
140
13
Real
Estate
It has been estimated that 90 oI all millionaires in the United States
made their Iortunes through real estate. Many Iinancial planners
look somewhat more unIavorably at real estate as an investment
than I do. Financial Planning is a comparatively new proIession; ac-
tually an oIIshoot oI the insurance industry. Many Iinancial planners
have connections either to insurance or stock brokerage houses and
are naturally more Iamiliar with those investments. Let me conIess
my own bias. I have been involved with some aspect oI real estate Ior
over twenty years. Real estate. unlike stocks and bonds where you
are at the mercy oI the market or another's management. allows you
to retain a degree oI control over your investment. Success may be
hastened by your own creativity and hard work with the potential
Ior proIits being almost unlimited.
THE NEGATIVES OF
REAL ESTATE INVESTMENT
ILLIQUIDITY
Those who would warn you against real estate investments would do
so on the basis that they are illiquid. It takes time to convert real
property into cash. However. the recent advent oI institutional in-
141
vestors into the real estate market has meant an increased liquidity
because they have been able to establish certain guidelines which
leads to Iaster analysis within the real estate community. Here I am
speaking oI investments in commercial real estate; shopping centers.
oIIice buildings. industrial property and the like. Income and single
Iamily residential property cannot usually be sold quickly because
the investor depends heavily on subiective things that cannot be
analyzed by a computer.
CYCLICAL
The health oI the real estate market is tied more closely to the general
health oI the economy as a whole than some other investments. This
is especially true in commercial and developmental real estate. The
areas oI real estate with the most potential Ior proIit. as you would
expect. have the greatest risk. People always need residential real
estateit is a necessity. However. high interest rates were responsi-
ble Ior the depressed housing market in the past Iew years (1980-83)
and high interest rates are part oI the cyclical problem.
VACANCY
An unexpected migration by a segment oI the population Irom one
part oI the country to another can have drastic eIIects on the real
estate market. This is beyond an investor's control but really no
more so than when he invests in aerospace stocks and bonds and
government policies change. A vacancy Iactor is Iigured in on the
liability side when analyzing a real estate investment. It is only when
this is exceeded because oI overall economic trends that a real prob-
lem can arise.
GOVERNMENTAL AND POLITICAL MEDDLING
Zoning changes. rent control. energy and new code requirements.
moving a highway or construction oI a new road. school or park all
aIIect real property Ior better or worse.
OBSOLESCENCE
Buildings become outdated and unable to compete with their newer
counterparts which naturally reduces their value. This is taken into
142
consideration. however. and is why a depreciation allowance is per-
mitted.
POSITIVE ASPECTS OF
REAL ESTATE INVESTMENTS
APPRECIATION
Real estate values have gone up consistently since the end oI the Great
Depression. The inIlux oI Ioreign money into the United States real
estate market attests to the general Ieeling that a well considered real
estate investment is extremely saIe because oI the political stability oI
America. Besides providing a hedge against inIlation. an investment
in real property enabled the investor to pay debt with inIlated dollars.
The dollars he borrowed to buy his property were worth much more
when he borrowed them than are the ones with which repayment is
made to the lender. It is wise to remember: "Borrow during times oI
inIlation; never lend. Ior you'll be short changed!"
CASH ROW
OIten real property can provide a monthly income rather like the
dividends paid by stocks or interest received Irom bonds. Usually in
order to obtain a cash Ilow. a considerable down payment must be
made when purchasing the property. otherwise. the mortgage
payments together with other expenses connected with the property.
would use Up all such proceeds. Alternately. cash Ilow may occur
aIter the property has been owned a Iew years and a second or third
mortgage has been paid oII thus reducing the overall payments re-
quired to "hold" the property. or when the rental market has increas-
ed and more dollars are coming in monthly.
TAX BENEFITS
Although an investment should never be made solely Ior its attrac-
tive tax-shelter Ieatures. those Ieatures should not be overlooked
when it comes to real estate investment. I will only mention these
beneIits here as they will be discussed in Section Five. There are
possible capital gains treatment. depreciation. interest and
143
maintenance deductions. investment credits plus the Iact that the "at
risk" rule (the rule that no more may be deducted Irom taxes than
what the investor actually had "at risk") does not apply to real estate.
LEVERAGE
Leverage is quite simply the use oI borrowed Iunds. In real estate it
has not been uncommon to use 75 to 80 oI another person's
money to purchase a property (usually in the Iorm oI a mortgage)
more uncommon. but not impossible. is the opportunity to make a
real estate investment with "Nothing Down" (title oI recommended
book by Robert Allen) as described in some oI the reading material
recommended at the end oI the chapter.
KINDS OF REAL ESTATE INVESTMENTS
SINGLE FAMILY RESIDENCE
During the 1970s single Iamily homes appreciated at a rate oI 15
annually across the nation. That rate was even higher in sections oI
CaliIornia and other sun-belt states. Such rapid inIlation could not
be expected to continue indeIinitely. Because the cost oI Iinancing
got out oI hand. putting home ownership beyond the reach oI many
people. in the 1980s you should see less turnover oI the higher priced
residences and a pick-up in the sales oI more aIIordable vacation
homes. Young people can rent near their workplaces and reap some
oI the beneIits oI home ownership in a resort area. This would not
have made sense 15 or 20 years ago but liIe styles today center
around sports and recreation and more and more people are delaying
marriage and/or children or eliminating that option altogether.
Parents have oIten helped their children buy their Iirst home but it
is more prevalent a practice today than ever beIore and naturally some
new methods have originated. "Necessitv is the mother of invention."
A child might borrow part oI the down payment Irom parents in
exchange Ior a personal note with principal and interest all due in
seven to ten years. That way the parents will not have to pay taxes
on the interest until they receive the money to do so. The child will be
able to deduct the interest paid to the parents when he is in a higher
bracket. II the parents don't charge interest or the interest charged is
144
lower than the market dictates the IRS is likely to consider the diI-
Ierence between zero or low and market interest as a taxable giIt.
With the large allowance Ior giIts. $10.000 non-taxable per person
could mean $40.000 would be excluded iI a mother and Iather com-
bined their allowances and made giIts to a child and his spouse. In all
likelihood. there would be no taxable giIt to pay anyway.
Another way to lend a helping hand is Ior the parents to buy the
house and rent it to the child with an option to buy it at a later date.
The rent would cover the mortgage payments. insurance. taxes. etc..
and the parents would take the depreciation and interest deductions
as long as the house was in their names. The rent would be taxable in-
come but out-oI-pocket expenses Ior upkeep and maintenance could
be oII-set against it. Similar to this plan is the idea whereby a parent
deposits enough money with a lender to make up the diIIerence be-
tween the 10 his child might be able to aIIord and the 14 market
rate charged by the institution. This scheme would allow the kids to
qualiIy Ior a mortgage that would otherwise be unattainable. The
real estate industry reIers to such a solution to the high priced hous-
ing dilemma as a "buy-down mortgage."
Equity sharing is another idea which is spreading in popularity.
Parents receive an interest in the house Ior their part oI the down
payment. They take title as co-owners with expenses. including
mortgage payments pro-rated. The child then pays rent to the parent
Ior the use oI the parents' share oI the house. OI course. the child
saves more on the reduced mortgage payments and expenses than
they pay in rent plus the parents get tax-shelter and a share oI ap-
preciation. which will be taxed at capital gains rates when the house
is eventually sold.
OI course. the most obvious and simplest way to help is to give a
giIt oI the entire down payment which. as mentioned above. can be
done tax-Iree up to $40.000 in one year couple to couple. OI course.
not many oI us can aIIord to be that generous much as we'd like to be
able to take the simple way out.
THE SINGLE FAMILY FIXER-UPPERS
There is little I can add to what has been said Iirst in books written by
William Nickerson. Albert Lowry and Robert Allen and which are
145
listed with other recommended reading at the end oI this chapter.
These books are easy and Iun to read and I recommend them highly.
Recycling. renovating or Iixing up; whatever you want to call it.
the system works! This is probably the surest. saIest way to invest in
real estate. Perhaps because it demands more brawn than brain;
more elbow grease than coniecture. You have to be able to swallow
your pride and become Iamiliar with dumps. dirty garbage cans.
cracked paint and old plumbing. The less capital you have to start
the more willing you have to be to do what needs doing yourselI.
There are hundreds oI excellent "How to..." books available and
contrary to popular belieI. city inspectors can be very instructive and
even helpIul when it comes to saving money.
Part oI "the system" is the time-worn admonition. "buy cheap;
sell dear." But buying "cheap" isn't the whole story; you must buy
right! Ideally. you should purchase property in the worst condition
in the best neighborhood. Location is everything in real estate. You
want the worst house on the block so the surrounding property will
compliment and beneIit any work you do to improve your own
property not vice versa.
Probably the most common mistake made by beginners is over
improvement. You must know what houses are selling Ior in the area
in which you intend to invest. You can Iind this out by contacting
your local Realty Board. Title Companies or City Hall. Stop improv-
ing when the house has been brought to neighborhood standards. It
is ridiculous to add a swimming pool and a tennis court to a house in
an area where homes sell Irom $100.000 to $150.000. You will not
even get back your costs.
The other trick in renovating rundown properties is to put as lit-
tle oI your own money into the proiect as possible. Use lenders'
money; usually a bank or savings institution. but it could be a
private party. Since 1978 there has been a good deal oI talk Irom the
real estate industry about the "new creative Iinancing." True.
creative Iinancing has become more pervasive during the last years as
home prices soared. but it is not a new concept. it has always been
the mainstay oI the shoestring renovator. There's nothing new about
getting a seller to carry back a mortgage on his rundown property.
The worst that could happen Irom his point oI view is that you (the
146
buyer) will put some time and eIIort into his neglected property and
then deIault on the loan. II you can't pay as you promised why the
poor old seller iust gets the renovated. or partially renovated proper-
ty back. You bet he's willing! II you approach him in the right spirit
he may be willing to sell you the property with nothing down.
There's no mystery to it. it's iust common sense.
RESIDENTIAL INCOME PROPERTY
What I said about using the other guy's money and doing work
yourselI holds true Ior residential income property too iI you are
short oI cash. A little more "brain" must be added to the "brawn" in
this area. however. You must Iigure out the gross income oI the
property you propose to buy and apply the proper "multiplier" Ior
your area to determine the price you are willing to pay. Gross in-
come is all the money the property brings in on an annual basis. For
instance. iI the property is small. three to Iour units. it might gross
$20.000 a year. II the "multiplier" Ior your area in the current market
is "9" you might want to pay $180.000 Ior the property. You would
then Iigure how much it would cost to improve the property so your
gross income could be raised. Everyone seems to have their own rule
oI thumb in this area. To pick one; let's say Ior every $10 oI improve-
ment you should get $30 more rent or $100 more selling price. You
can begin to see that iI you do such and such you will realize such and
such return. We're talking about the same concept we've been using
with stocks. bonds and mutual Iunds; the actual return on dollars in-
vested. In real estate the rate oI return is the net income Irom the
property beIore interest and depreciation. divided by the purchase
price. For example: $20.000 divided by $180.000 11 rate oI
return.
II the property needs work but the income is already too high or
even at market. pass that property by. You need to be able to add to
or improve in such a way that the income will increase as a result oI
your work.
The next thing to consider is the net income (gross income minus
expenses). Will the property carry itselI or will you have to dig into
your own pocket every month to meet the mortgage(s). taxes.
utilities. insurance. maintenance and repair cost? But even so.
147
remember all such losses are tax deductible as are interest payments
and a certain amount oI the properties' supposed loss in value over
time (depreciation allowance). Real estate is valued Ior its tax shelter
possibilities and you iust may Iind the beneIits outweigh the negative
aspects. Where else can you get such a combination oI capital growth
and tax shelter in one package? Not only have real estate prices gone
up in past years. keeping pace with inIlation. but an investor's equity
in the property increases with each mortgage payment indirectly
paid by tenants. All this is in addition to the regular pull oI supply
and demand at work in a Iree marketplace which has kept the prices
oI real estate on a one way (UP) direction since the second world
war. Additionally. income property requires you to have the hours
oI an obstetrician (plumbing and heating emergencies always seem to
occur in the middle oI the night) and the stamina oI the head oI the
complaint department at your local shopping center.
DEVELOPMENT
We have seen that residential real estate can be a good investment
even Ior amateurs who are willing to ask questions and work hard.
Success or Iailure can be in your hands iI you choose to keep control.
Not so in development. You are at the mercy oI contractors. ar-
chitects. raw material suppliers. attorneys. lenders and even the
overall political and economic situation. Development is not Ior the
uninitiated!
COMMERCIAL REAL ESTATE
When we speak oI commercial real estate and industrial real estate
we reIer to shopping centers. oIIice buildings and warehouses. Just as
the value oI residential income property is determined by multiply-
ing gross annual rental income by a Iluctuating (Iluctuating accord-
ing to locality and market conditions) "multiplier." commercial real
estate is valued by applying a similar market derived Iigure known as
the "cap rate" (capitalization rate) to revenue using one oI two possi-
ble methods. the pre-debt or cash-on-cash approach. Figuring what
it would cost to build a new structure similar to the one you are con-
templating as an investment is an alternate means oI determining
value Ior all types oI real estate. The ideal balance is where the
148
capitalized value oI the investment approximates the reproduction
cost oI the property.
The key to success in commerical real estate lies in Iinding a prop-
erty in a good location. a tenant with strong credit and negotiating a
good lease. Investors not interested in managing their properties
oIten look Ior triple-net leases. Under a triple-net lease the tenant. in
addition to making the rental payments. is responsible Ior all
operating expenses. debt service on the landlord's mortgage and the
property taxes.
Because commercial real estate is based heavily on iudgments and
negotiating skill which can not be acquired overnight. this is not a
suitable investment Ior the novice unless he is Iortunate to have at his
side an extremely competent broker in whom he has complete trust.
R.E.I.T.sREAL ESTATE INVESTMENT TRUSTS
A real estate investment trust may be either a trust or a corporation.
The trustee or directors invest the assets only in real estate holdings.
Each individual investor owns shares oI the portIolio.
There are basically three types oI R.E.I.T.s; those that own real
property. those who lends money Ior real estate development and a
combination oI the two. Since shares are traded on the stock market.
R.E.I.T. owners Iind themselves with a liquid asset. This is the only
Iorm oI real estate ownership that can be priced daily without an ap-
praiser; the supply and demand oI the stock market IulIills that role.
Potential investors should investigate this Iorm oI real estate owner-
ship as they would any cyclical stock (see chapter 11) with the addi-
tional warning that in general R.E.I.T.s are not widely held so the
small investor may Iind himselI at the mercy oI larger stockholders
whose movement could drastically aIIect the price oI the stock.
LIMITED PARTNERSHIPS.
SOMETIMES REFERRED TO
AS SYNDICATIONS
A limited partnership is made up oI one or more general partners
who actually manage the aIIairs oI the partnership and assume per-
sonal liability. and one or more limited partners who are passive in-
vestors with their liability limited to the size oI their investment. The
149
passive investor Iinds himselI dependent upon the management and
expertise oI the general partner. ThereIore. it is imperative to Iind
out everything you can about the general partner beIore committing
your investment dollars. Because partnership equities are not sold on
a liquid market (like the R.E.I.T.s) it is wise to see that a buy-out ar-
rangement is included in the purchase agreement. tied somehow to
the Iluctuating market price oI something agreed upon by all at the
inception. II there is no such provision. you may Iind you are Iorced
to suIIer a sizeable loss should you need to sell your investment in an
emergency situation.
Limited partnerships provide a way Ior the investor who has little
knowledge oI real estate and no desire to learn. an opportunity to
participate in the beneIits oI appreciation and depreciation (tax
deductions) with a relatively small capital outlay and limited risk.
Limited partnerships are very attractive vehicles Ior real estate in-
vestment iI you do not mind putting your investment beyond your
own control. So much depends on the qualiIications and integrity oI
the general partner. I. thereIore. cannot emphasis strongly enough
that you should proceed with extreme caution beIore going ahead
with this type oI investment. both because oI the liquidity problem
and the required dependence upon the general partner.
SUMMARY
On the plus side real estate provides an opportunity to leverage. at-
tain capital growth. is a hedge against inIlation and has various tax
advantages. On top oI this it may provide shelter (single or income
residential) as well as pride oI ownership.
On the negative side. it is relatively illiquid. cyclical and more
vulnerable to changes in the economy than some other investments.
It is hard to "go wrong" with residential real estate iI you buy the
worst house or 4-plex on the block at a very low price but in a good
location. R.E.I.T.s and limited partnerships can be very lucrative in-
vestments Ior the passive investor who has a degree oI sophistication
in this area and has done his homework. Real estate development
and commercial industrial investments. however. should be leIt to
the real estate proIessionals.
150
WORKSHEETCHAPTER THIRTEEN
WHAT KIND
OF REAL ESTATE INVESTMENT
IS RIGHT FOR ME?
Circle a number. 1 means you agree strongly, down to 5 ,
signifying strong disagreement.
1. would liketoworkwithtenants. 12345
2. can do "fix up" myself. 12 3 4 5
3. can and want to make time to manage property. 1234 5
4. like responsibility. 12345
5. have other liquid assets. 1234 5
6. want profits or capital gain more than safety. 12345
7. don't like passive investments. 12 3 4 5
8. don't mind borrowing money. 12 3 4 5
9. like to set goals and follow plans. 12345
10. like to be in control of a situation. 12345
11. have adequate emergency funds set aside. 1234 5
12. have trouble putting my trust in another's judgment.
1 2345
SCORNG
f you scored 12-25 give residential income property a try!
151
f you scored 40 or above RETs or Partnerships may be for
you.
n the 26-39 range analyze your answers carefully:
f you circled #1 or #2 for questions 4, 7, 10 and 12, stay
away from RETs and Limited Partnerships. f you marked #4
or #5 on questions 4, 7, 10 and 12 stay away from income
property involving management responsibilities.
152
RECOMMENDED READING
CHAPTER THIRTEEN
All books written bv.
William Nickerson
Albert Lowry
Robert Allen
Complete Guide to Real Estate Financing. by Jack Cummings
You Can Profit from Real Estate Appreciation. by Maury Seldin
How to Borrow vour Wav to Real Estate Riches. by Tyler Hicks
Inspecting a House. by Alan Carson & Robert Dunlop
Real Estate Investment. by John E. Wiedemer
Tax Planning for Real Estate Investors. by Kau & Simians
The Real Estate Investing Profit Guide. by Michael Glasscock
How to Use Leverage to Make Monev in Local Real Estate. by
George Bockl
The Complete Real Estate Investment Handbook. by Sirmans & JaIIe
The Real Estate Book. by Robert Nessen
Prentice Hall Master Guide to Real Estate Investing. edited by Oliver
Ray Price
How We Made a Million Dollars Recvcling Great Old Homes. by
Sam & Mary Weir
House Recvcling. by Mary Weir
Professional Real Estate Investing. How to Evaluate Complex Invest-
ment Alternatives. by Fred E. Case
Rental Homes. The Tax Shelter That Works and Grows for You. by
Vincent Zucchero
153
14
Utilitarian
Investments
The possibilities Ior investment are truly unlimited. Someone.
somewhere will take any dollars you can spare Ior something' The
vast variety oI goals that people hope to attain by isolating invest-
ment dollars Irom spendable income is as limitless as the choice oI in-
vestments. One thing all investors seem to have in common.
however. is concern Ior the Iuture.
UTILITARIAN INVESTMENTS
Investments in this category have certain things in common. None
generate income but all would be considered a hedge against inIla-
tion. Most are status symbols capable oI being appreciated Ior their
intrinsic beauty aside Irom any monetary or image building value
they may possess. There is risk in this type oI investment. Not only
could there not be a proIit on resale but perhaps worth in terms oI
dollars may decline during the time the investment is held. There are
numerous reasons Ior assuming such a possibility. many unique to
the particular investment (such as dry rot attacking an oriental rug.
etc.) but there are two reasons they all share. First is the possibility
that you as an investor did not "buy right" in the Iirst place. That is
why it is so important not only to buy Irom a reputable dealer but in
155
many instances it would be prudent to enlist the services oI a highly
qualiIied proIessional adviser and perhaps have him make purchases
Ior you. The second reason Ior an investment loss may be that the
property was not held long enough. Appreciation occasionally hap-
pens overnight. but normally time is required. OIten commissions
are involved and the costs oI buying and selling may eat up proIits
within a short time period and indeed these overhead costs may be
responsible Ior the losses.
INVESTING IN COINS
It is important to buy with a long-term commitment in mind. It may
be prudent to start with a "type set" at Iirst (collection oI one oI each
coin oI a given series) but diversiIy as soon as possible to oIIset the eI-
Iect oI cycles in the volatile coin market. Try buying diIIerent metals;
copper. nickel. gold and silver as well as coins Irom diIIerent time
periods and locations. Always buy the best you can aIIord. choosing
one quality coin over Iive oI lesser quality. The worth oI a particular
coin is determined by its condition and rarity and has little to do with
its Iace value or age. People sometimes purchase numismatic coins
aIter hearing oI spectacular proIits as well as being attracted by their
reputation as an inIlation hedge. As with all investments I've labeled
"utilitarian." it is imperative that you work with a well established
reputable dealer. Collecting rare coins is an excellent example oI
combining hobby and investment.
STAMPS
Stamps. like the coins discussed above. are easy to store and
transport. Most American investors are not as impressed by this Iact
as investors living in less stable environments might be. Gold.
diamonds. coins and stamps have historically been a wise investment
Ior those who anticipate having to Ilee Irom oppression or worse.
Stamps are valued Ior their rarity and condition and are one oI the
Iew items in this world that increases in value due to someone's error.
A printing mistake is. oI course. rare and the resulting stamps are
prized by collectors. Don't buy cheap packets advertised in
156
magazines but specialize in a particular location. time period or type
oI stamp. such as all airmail or sports oriented or animals. etc. II you
are a serious investor and care more about the possible appreciation
than the enioyment oI collecting. it may be worth your while to hire
a knowledgeable adviser or agent to make acquisitions Ior you. pay-
ing him a Iive to ten percent commission on each purchase.
DIAMONDS
What has been said about stamps and coins as portable inIlation
hedges which should be purchased under careIul supervision. the
best quality you can aIIord and Irom reputable dealers is equally true
Ior diamonds. The problem to overcome when investing in
diamonds is the 30 to 100 markup between wholesale and retail
costs. The average lay investor must buy retail and sell wholesale.
The other problem is. oI course. the volatility oI the diamond market
in spite oI the De Beers Organization's heavy control. The apprecia-
tion oI the diamond. even iI held Ior a long period. must be great to
overcome this handicap. Serious investors should really purchase
diamonds oI Iour carats and up. This calls Ior a large commitment oI
investment dollars and may suit the relatively aIIluent investor who
already has other diversiIied holdings. The value oI a diamond is
determined by how well it measures up to the "4Cs": carat (weight).
color. cut and clarity. The utilitarian advantage oI choosing
diamonds as an investment are well known. The stones can be worn
with satisIaction and pride by both men and women and this is in
itselI a very enticing attribute oI this investment. A word oI caution.
however; the cost oI elaborate settings has been known to diminish
the appreciation a particular gem may have achieved over time.
PAINTINGS. PRINTS AND PHOTOGRAPHY
Young people and corporations have entered this Iield in remarkable
numbers over the past ten years looking Ior an inIlation hedge and
appreciation oI their assets. OI course. a side beneIit is the beautiIica-
tion oI the surroundings. whether corporate headquarters or home.
while the investment is given time to increase in value. Naturally.
157
there is risk. especially iI works oI a relatively new artist are purchas-
ed. Works oI a deceased artist (signiIying a limited supply) who has
an already established reputation in the art world. is probably a
more secure investment. but. depending on the artist and the work.
will probably cost more. In many cases. especially when con-
templating large capital outlays. it is wise to engage the services oI an
adviser. Many would suggest that you specialize in one area or build
a collection around one theme but buy the works oI a variety oI art-
ists. It is well to remember that a good drawing or print by the same
artist may be worth more than a poor painting.
Photography has gained in popularity because oI its relatively
low cost although retaining the same potential Ior appreciation and
immeasurable pleasure ownership oI paintings and prints oIIers.
ORIENTAL RUGS
Oriental rugs or carpets. are handwoven products oI the Near. Mid-
dle. and Far East. the Balkans and the area between the Black and
Caspian Seas. Their value is based on age (over 100 years is con-
sidered an antique and can enter the U.S. duty Iree). quality oI con-
struction (reIers to density and Iineness oI weave). size (the larger the
better). and place oI origin. The celebrated Persian rugs are products
oI Iran and most sought aIter by some collectors while others preIer
the Chinese rugs which are more readily available nowadays (1983).
To maintain the value oI oriental rugs they should be turned once a
year and proIessionally cleaned every Iive years. Stay away Irom
"traveling" auctions. although estate auctions run by a reputable
auctioneer established in your area may yield some good values.
Department stores are recommended places to buy. only make cer-
tain you are getting the "real thing" Ior investment purposes. not
machine made copies. As with all "utilitarian investments." it is wise
to have your rugs revalued Ior insurance purposes on a regular basis
and keep pictures oI them in a saIe place.
158
ANTIQUE FURNITURE
Collecting antique Iurniture is a great way to Iill the need Ior
household Iurnishings. investment and hobby at one Iell swoop.
Remember to be classiIied as an antique the article must be 100 years
old at least. The value oI an antique depends Iirst oI all on its
veriIiable authenticity. Secondly. the quality and construction oI
your particular piece. Iollowed by consideration oI age and locality.
Although it is a good idea to make acquisitions at auctions rather
than pay the retail markup. it may be even cheaper to engage some-
one knowledgeable to handle such purchases Ior you. One word oI
caution Irom a mother oI Iive: because oI maintenance and preserva-
tion oI your investment this is obviously a poor investment Ior peo-
ple with young children.
GOLD. SILVER. PLATINUM
It is a borderline decision to call these metals "utilitarian
investments." although it is true they are used Ior iewelry. eating and
serving utensils and in industry. There is a worldwide market Ior
gold and silver. making them more liquid than most investments in
this category. However. platinum is traded only on one U.S. com-
modity exchange. There are several Iorms an investment in one oI
these metals might take. The most conservative being the purchase
and physical holding oI the metal itselI. Many people have in their
possession gold Krugerands (South AIrica). or Maple LeaIs (Canada)
and bags oI iunk silver (American pre-1964 coins). It is not wise to
buy commemorative sets privately minted or actively promoted
"waIers" because oI the high premium charged over the bullion price.
Investors concerned with preserving capital and purchasing power
should lose nothing by holding the metal long-term and using the
dollar-cost-averaging concept discussed elsewhere. These metals are
notorious inIlation hedges and although there is potential Ior loss in
the short run. history shows they have appreciated over the long
haul. Many advisers recommend a certain portion oI every client's
portIolio include these metalsespecially goldto balance stocks
and other investments that may sour in response to bad national or
159
worldwide economic news or disaster. Because bad news pushes gold
up it is oIten used as an insurance or deIensive investment.
A less conservative investment in gold. silver or platinum is to
purchase mining shares. The Iact that these stocks pay dividends is
an attraction Ior some people. An even more speculative investment
in these metals would be the purchase oI highly leveraged Iuture con-
tracts. There are many excellent books written about investing in
precious metals. (See recommended reading list at the end oI this
chapter.)
BONUSA FANTASYINVESTING
IN MOVIES AND THEATRICAL PRODUCTIONS
I realize that you. the average person reading this book. is never go-
ing to invest in motion pictures or theatrical productions because the
minimum amount required starts at a low oI somewhere around
$25.000 ranging up to more than $200.000 a unit (piece oI the action).
but wouldn't you like to dream about it?
The main attraction is the opportunity to participate in a Iantasy.
There is the glamour surrounding the motion picture industry and
even iI you never get to actually rub elbows with the stars. directors
and producers whose names you see on the screen. a certain amount
oI excitement does rub oII. Perhaps the Iantasy is that in return Ior
your $50.000 or $100.000 you're going to make millions. Ridiculous
but not impossible. II you only could have invested in Gandhi. Toot-
sie. E. T. or Star Wars'' This is perhaps the investment with unlimited
possibilities. Ior certainly there is little relationship between the size
oI the investment and the potential proIits. Sure a stock can
skyrocket and an oil well can turn out to be a real gusher but the
possible proIits Irom such good Iortune can be more easily predicted
and calculated than can proIits Irom a block-buster movie. Records
are constantly being broken in this area and there are T.V. and
videotapes and other subsidiary proIits. Remember. it is customary
Ior the investor to share in 50 oI the proIits and this can be ac-
complished by limiting risk by investing through a limited partner-
ship. Don't despair. even iI you don't know any producers personal-
ly you can gain access to these investments through the maior invest-
160
ment houses. You should be aware that the brokers' commission
generally runs 8 to 10 oI your investment. but you are paying
Ior advice and guidance in an area in which you are very likely a
novice.
Although unlimited proIits coupled with limited risk may sound
good. the odds are so weighted against success in this industry that
many investors in the past went into this type oI investment hoping
to deduct losses larger than their individual investment. This practice
has been stopped by Section oI 465 oI the Internal Revenue Code
known aIIectionately as the "At Risk" rule which basically says that
a person cannot declare losses beyond the amount oI his investment
in the proiect. ProIits. should there be any. are treated as ordinary in-
come rather than enioying the beneIits oI the lower tax rates accord-
ed capital gains. There are. however. investment tax credits and
depreciation allowances but it should be readily apparent that possi-
ble tax advantages are not a motivating Ieature oI this investment.
II I had a spare $25.000 bill lying around and I only had a couple
oI years to live. I might preIer the aura oI investing in a motion pic-
ture to that oI placing a bet in Vegas. Both are long shots and both oI-
Ier the possibility oI making a disproportionately high return in a
relatively short period oI time. To other people the appeal is the in-
tangible beneIit oI being associated with the production oI an artistic
work. This is the motivation Ior many beneIactors. It would appear
that the maiority oI investors in this industry must be prepared to
lose and get a thrill or some sense oI accomplishment wholly divorc-
ed Irom economics.
Perhaps you have your own scenario Ior making this kind oI in-
vestment. II all criteria should come togetherwell. bon chance'
SUMMARY
II you are a novice investor rely on a knowledgeable adviser until
you have reached a certain investment goal. II you're Iull oI curiosity
and have a spirit oI adventure. go ahead and indulge it by testing
some oI the more exotic investments. like horses. oil/gas. options.
Iutures. commodities. etc.. but only with "risk" or "mad" money.
You never want to throw money away (except as a beneIactor when
161
you know the proiect is not economically sound but it is undertaken
as a causea contribution to society as discussed brieIly in the
discussion oI motion picture investing). so when you have graduated
Irom total dependence on your advisers' recommendations and want
to experiment on your own. take Sydl P. TaccIl with you. In Iact. use
Sydl to see that your adviser is doing his homework; never become
totally dependent on anyone! BeIore you commit your dollars to any
investment see how it measures up in terms oI Security; Yield. Diver-
siIication; Liquidity; can it provide Protection Irom creditors by
making it in a trust. Ior instance; Period oI time it should be held;
Tax advantages. iI any; use as an inIlation hedge; Callability; Con-
venience; can it be used as Collateral; can you aIIord the Amount
needed Ior this investment; does it oIIer Freedom Irom worry and
make sure it's Legal!
The "utilitarian investments" discussed here have been categoriz-
ed to some extent in the Iollowing worksheet which you should
adopt to your individual situation.
162
WORKSHEETCHAPTER FOURTEEN
By now, you should have a pretty good idea of what you per-
sonally are looking for in an investment. Write that down in
your notebook. The investments discussed in Chapter 14 are
listed here with a few characteristics of each placed in a
"PLUS" or "MNUS" column. Assign your own plus and
minus system to these and any other investment you are con-
sidering. For instance, if you believe inflation is under control
"inflation hedge" would not go in your particular "Plus" col-
umn. f you don't need current income the fact that no in-
come is generated by an investment would not go in your
"MNUS" column, etc.
163
nvestment "PLUS"
Coins inflation hedge
sm. amt. needed
moderately liquid
portable
fluctuating market
needs adviser
risk
no income
Stamps hobby
ibid
ibid
Diamonds inflation hedge
portable
pride of ownership
large amt. of $$
needed
high markup
ibid
Paintings inflation hedge amt. needed ?
pride of ownership risk of
appreciation
need adviser
no income
Prints ibid
cheaper than
above
risk of
appreciation
need adviser
no income
Photography ibid ibid
Rugs inflation hedge
pride of ownership
usefulness
amt. needed?
must be
maintained
no income
Antiques ibid ibid
may need adviser
Precious inflation hedge no income
Metals liquid fluctuating market
possible
________________________________regulations
Movies & tax advantages high risk
Theatre glamour large amt. $$
potential high, needed
fast profits no salvage value
altruism
164
MNUS'
RECOMMENDED READING
CHAPTER FOURTEEN
Encvclopedia of Investments. by Marshall Blume & Jack Friedman
The Commoditv Futures Game. by T.W. Stone
How the Experts Buv & Sell Gold Bullion. Gold Stocks & Gold
Coins. by James Sinclair & Harry Shultz
Guide to Antiques & Collectibles. edited by Thomas Hudgeons III
Know Your Collectibles. Antique & Collectibles Price List. by Ralph
& Terry Kovel
Options As a Strategic Investment. by Lawrence McMillan
The Commoditv Futures & Market Guide. by Kroll & Shishko
How to Buv & Sell Gems. by Beniamin Zucker
How to Invest in Strategic Metals. by Bohdan Szuprowicz
How to Trade Put & Call Options. by Lawrence Rosen
Investing in Natural Resources. by Walter Youngquist
The Fastest Game in Town. Commodities. by Mark Robert Yarry
The New Options Market. by Max Ansbacher
Stamps for Investment. by Kenneth Lake
Your Gold & Silver. by Henry Merton
Practical Guide to Antique Collecting. by GeoIIrey Wills
The Stock Options Manual. by Gary L. Gastineau
How to Buv Gold. by Timothy Green
How to Invest in Gold Stock & Avoid the Pitfalls. by Donald Hoppe
165

Older achievers

How to take benefits

What is available?
What is retirement?
166
SECTION FOUR
15
What
Is Retirement?
RETIREMENT YEARS
CAN AND SHOULD BE FULFILLING
BeIore 1937 only the wealthy could look Iorward to retirement. With
the advent oI the social security system and the proliIeration oI pen-
sion and proIit sharing plans. retirement has become the province oI
the average man.
Many people dream oI traveling. improving their golI score. sail-
ing. Iixing-up that boat. antique car or house the way they always
envisioned. gardening. painting. working on that stamp or coin col-
lection or maybe getting more education at the local college and
branching out into an entirely new Iield. An old Jewish Proverb says.
"For the ignorant old age is as winter; Ior the learned it is a harvest."
There is now ample evidence to support what was at one time only
speculation; that being active in body and mind prolongs liIe. Taking
an interest in living is necessary Ior health and happiness. Man seems
to need to Ieel useIul. We hear so much about the dangers oI stress
but total lack oI stressboredomcan also menace your well-
being. It only goes to show what the Ancient Greeks knew thousands
oI years ago. that the "golden mean"; the midpoint between ex-
tremes. is the surest way to health and happiness. Too much oI a
good thing. even relaxation. can be harmIul. Lying in bed or sitting
169
in the sun doing nothing most oI the day is a luxury when we are on
vacation because our bodies and minds need that rest. and it may
even Ieel great Ior the Iirst Iew weeks aIter you retire; no longer hav-
ing to rush Ior that 7 a.m. commutebut something purposeIul.
meaningIul must soon take its place or boredom and discontent will
set in. I once read that one must not lose desires. They are mighty
stimulants to creativity. to love. and to long liIe. Henry Thoreau put
it this way: "None are so old as those who have outlived
enthusiasm."
NEVER TOO EARLY TO PREPARE
Most oI us start Iantasizing in our Iorties about all the things we're
going to do when we retire. but those ambitions will remain Iantasies
with no chance oI attaining reality unless preparation is begun early.
The "early bird" may catch the worm but let me show you an exam-
ple oI what the "early investment bird" can catch!
With an investment oI $2.000 per year at 10. Sue. at age twen-
ty. begins providing Ior her retirement. Twenty years later. at the
age oI Iorty. she has invested $40.000 ($2.000 per year Ior twenty
years) which has grown to $126.000. Meanwhile Mary consumed all
her income at age twenty but began investing using the identical pro-
gram as Sue but waited until she was Iorty years old. Sue continues
with the same program. Twenty years later (and another $40.000)
Mary is sixty years old and has an investment worth $126.000 but
Sue who is also sixty years old now has an investment worth. not
double Mary's. or $252.000 as you might expect since she put in
twice as many investment dollars over the years. but Sue has at age
sixty an investment worth $973.704!!! No. it's not a misprint. Sue's
total investment oI $80.000 worked Ior her over the years. Ieeding on
itselI. interest earning interest until it was worth $973.704!! More will
be said about compounding interest. That was the "magic" that oc-
curred in the example Ior both Mary and Sue.
170
RESULTS WITH COMPOUNDING
MARY
cumulative cumulativ
e
cumulative m10 cumulative m10
age contributions interest age contributions interest
20 $2.000 $2.200 20 ------------ -------
25 10.000 13.432 25 ------------ -------
30 20.000 35.062 30 ------------ -------
35 30.000 69.900 35 ------------ -------
40 40.000 126.004 40 $2.000 $2.200
45 50.000 216.364 45 10.000 13.432
50 60.000 361.886 50 20.000 35.062
55 70.000 596.254 55 30.000 69.900
60 80.000 973.704 60 40.000 126.004
I realize there is a great temptation to readers still in their twenties
and thirties to skip this section on retirement. but really the earlier
retirement planning is begun the happier those later years will be.
You cannot tell iI a man has led a lucky. successIul or happy liIe until
the end has been reached.
Oscar Wilde once said. "When I was young I thought that money
was the most important thing in liIe; now that I am old I know that it
is." OI course. that was said in iest. but it is amazing how many peo-
ple minimize the important role money will play in their old age. In
many cases it is not being replaced. only consumed and that is why
all the assets you have upon retirement should be working Ior you
bringing in interest. dividends or rents. Even though you may be ac-
tive. not many oI you will also be generating income at the same level
you did during those most productive pre-retirement years when you
had reached the top oI your Iield.
I recently heard oI an organization in New York City which at-
tempts to salvage the latent talents and skills oI seniors. "Senior
Achievers Enterprises" is dedicated to providing our older citizens
with productive work in exchange Ior reasonable compensation.
HopeIully organizations like this will someday replace senior citizen
centers which are generally non-productive in the sense that the
171
SUE
training and years oI experience oI most seniors is not utilized to the
Iullest in watercolor classes. bird watching. Iolk dancing and card
playing activities.
I realize it is hard Ior many young people to look ahead. More
and more Americans live Ior today with the hope that tomorrow will
take care oI itselI. The excuse most oIten heard Ior living only Ior to-
day is the threat oI nuclear war. "We may not be here tomorrow." it
goes. "so why plan Ior it?" There have been Iears oI the world ending
which have tempted every generation into that kind oI thinking. It is
only recently and in America. however. that the government itselI
has Iostered the "live Ior today" attitude by subsidizing consumption
and penalizing savings; by oIIering tax deductions Ior consumer in-
terest payments.
The Iact is we as a nation are iust beginning to recognize the
Iallacy oI such short-term thinking. II we are to compete with nations
such as Japan. whose people habitually sacriIice short-term desires
Ior the good oI the long-run. we must re-educate our politicians. In-
dividual citizens must also adopt long
:
range planning when dealing
with their own economic realities.
INFLATION
A Iew years ago the destructive Iorce oI inIlation was more visible
than it is today. As I write this our inIlation rate is down to less than
4 so it is easy to discount inIlation as a threat to our Iuture security.
For years inIlation was 3 to 4 . Interest rates. which generally
run about 3 higher than inIlation were 6 to 7 during those
same years. The present high interest rates. in spite oI low inIlation.
reIlect the huge government deIicit that must be resolved and conse-
quently. or additionally. expectations that inIlation will rise again in
the not too distant Iuture.
You probably know oI many seniors on a Iixed income who had
savings at 5J* when inIlation was running at 13 to 14. They
saw the purchasing power oI those dollars diminish beIore their eyes.
Most people realize by now that high prices and high wages are
results. not causes oI inIlation. InIlation occurs when an increase in
the money supply is unaccompanied by a corresponding increase in
172
the production oI goods and services. For example. let's take the
imaginary town oI Contentment; population 1.000; Iull employ-
ment; no rich; no poor but the entire population is quite content.
Suddenly a dozen limosines drive up loaded with wealthy tourists
who like the quaint little town so much they decide to stay. The price
oI Iood. lodging. services suddenly zooms up. There iust isn't enough
to go around. The wealthy tourists have increased the money supply
without increasing goods and services; the result is skyrocketing
pricesinIlation!
In America the money supply increased more than 700 Irom
1945 to 1980 and the average price Ior goods and services increased
1200. For example. a cup oI coIIee went Irom 5* to 50*. magazines
Irom 5* to $1.25. movies Irom 25* to $3.25 and an average house
Irom $5.000 to $80.000. Production rose. oI course. but not at the
same rate. Both the government and its individual citizens expanded
their desires Iaster than their real incomes. DeIicit spending was
possible Ior so long because the Federal Reserve. through the banks.
made money available. When that policy was reversed by the tight
money policies oI Paul Volcker (Head oI the Federal Reserve beginn-
ing in 1980). oI course. interest rates went up because enough money
was no longer available to meet the demands oI eager borrowers. We
should all be grateIul to Paul Volcker Ior calling a halt. that is all oI us
who avoided bankruptcy and unemployment!
This is an extremely simpliIied explanation oI the halt oI inIla-
tion. Actually. inIlation is an interdependent worldwide phenomena
and it cannot be licked permanently as long as our huge deIicit
budgets remain. II I hadn't lost my respect Ior "experts" who oIten
disguise their own ignorance by claiming something is "too com-
plicated to go into.. .." I'd make that same claim right here. One
thing is crystal clear; we cannot trust the politicians to discipline
themselves!! Although we hope Ior low inIlation we must all hedge
against the possibility oI reinIlation.
173
UNCERTAINTY CALLS
FOR SHORT-TERM INVESTMENT STRATEGIES
In a Iluctuating market. diversiIying your investments is more impor-
tant than ever. In uncertain times like the early 1980s have shown
themselves to be. the best advice may be to invest short-term and
plan long-term. It is not wise to get locked into any investment over a
long period oI years when so many "experts" diIIer on the call oI in-
terest (up? or down?) and on whether inIlation has really been licked.
WHAT DOES RETIREMENT
MEAN TO YOU?
We began this chapter with a discussion oI the Iantasies people have
about retirement. In the worksheet that Iollows you will attempt to
come to terms with your own dreams about the Iuture. Once your
idea oI retirement is deIined. steps can be taken. prudent investments
made and skills and education acquired iI they should be the ingre-
dients necessary Ior the IulIilment oI those dreams.
Some expenses connected with health care. entertainment and
travel may rise upon retirement. however many more expenses will
disappear. Smaller living quarters with their accompanying smaller
utility bills; lower or a paid-oII mortgage and liIe insurance policies;
no more commuter and other iob related expenses; lower Iood bills
and use oI dollars once siphoned oII to support the now selI-
suIIicient kids are a Iew beneIits you might look Iorward to. In addi-
tion you'll Iind medicare will go a long way towards lowering
hospital and doctor bills. Tax breaks will also be a part oI your status
as a senior and should be remembered in your planning. Don't Iorget
the "exemption" Ior persons over 65 and one time break on selling
your residence and credit up to 15 oI your retirement income. etc.
THE BEST THING TO SAVE
FOR YOUR OLD AGE IS YOURSELF
All the skills you have built up over a liIetime can be put to good use
in your retirement years. In most cases. you have the time. you only
174
need the conIidence and determination. Now is the time to review
chapter Iive.
What you're able to produce Ior your own use is tax-Iree and also
reduces your expenses. What you can make or do Ior others can
make you selI-suIIicient. give you a sense oI pride and worth. a circle
oI admiring Iriends and customers and. oI course. great pleasure.
FREE ADVICE CAN BE EXPENSIVE
UnIortunately. there are proIiteers waiting to prey on the Iears and
anxieties oI older newly retired people. Salesmen. annuity peddlers.
bank employees or anyone who acts beyond the scope oI his exper-
tise will only mislead you. Never take technical advice Irom iust
anyone because it is "Iree." Huge proIits may well be the motivation
oI unscrupulous persons who smilingly oIIer this ultimately very
costly advice. An honest-to-goodness desire to help may also be the
motivation. but iI the person is not an expert in the area in which he
oIIers advice. good motives will not make him any less a danger to
you. On the other hand. iI you can tell the diIIerence between good
and bad advice then you probably don't really need it anyhow!
SUMMARY
Chances are you will live long enough to retire and you had better
make preparations Ior that time; intellectual and emotional as well as
Iinancial preparations. The earlier you set Iunds aside Ior growth
towards retirement the cheaper your retirement will be because those
Iunds have a longer time to compound. Don't be too certain that in-
Ilation will still be under control when you retire. DiversiIy your
retirement investments including some traditionally inIlation hedges
such as hard assets. Don't get into long term commitments because
the present market is Iar too volatile. on the other hand don't "park"
all your assets on the sidelines either (money market Iunds or savings
accounts. etc.) waiting until you're shown some "sign" as to what the
stock and real estate markets are going to do and which way inIlation
175
and the national debt will turn. DiversiIy time as well as investment
vehicles. Have some investments maturing in less than a year. two or
three years and some in Iive years. Don't go out more than Iive years
without a possible escape. The Iollowing worksheet will help you
discover what you expect and desire your retirement to be.
176
WORKSHEETCHAPTER FIFTEEN
1. When do want to retire?
2. What do intend to do with my time when retire?
3. What is my anticipated standard of living with regards to:
housing? food? travel? entertaining?
clothes? automobiles? charity? other?
4. What inflation rate do anticipate between now & retire-
ment?
CURRENT BUDGET
BUDGET WHEN 1 RETRE
Housing Costs
mtg. pymt or rent _______________ ________________
property taxes _______________ ________________
insurance (HO) _______________ ________________
utilities _______________ ________________
maintenance _______________ ________________
Food
regular meals @
home _______________ ________________
restaurants _______________ ________________
at home entertaining_________________ ________________
Transportation
car upkeep _______________ _______________
ordinary gas cost ________________ _______________
auto insurance _______________ _______________
177
commuting expense
= gas________________________________________
= parking ______________ ______________
= tolls________________________________________
airfares ______________ ______________
train, bus, other ______________ ______________
Life & Other nsurance
Premiums
(except HO) ______________ ______________
nvestment Savings ______________ ______________
Medical Expenses ______________ ______________
Education, Books,
Papers & Magazine
Subscriptions ______________
Travel & Entertain-
ment (ncluding
Vacations) ______________
Miscellaneous ___________ _________
178
RECOMMENDED READING
CHAPTER FIFTEEN
Strategies for the Second Half of Life. by Peter Weaver
The Best Years Book. by Hugh Downs & Richard Roll
Where Will You Live Tomorrow. by Sumichrast. ShaIer &
Sumichrast
Tax Tactics for the Retired. by Terry & Susan Schandel
Dont Die Broke. by Melvin Jay Swartz
60 Plus in California. by William & Laurie Wishard
Public Policv and the Aging. by William W. Lammers
179
16
What
Is Available ?
The time when one could be wholly selI-suIIicient. iI there ever was
such a time. may be over. OI course. I believe and would encourage
you to consider that individual savings and investment programs. iI
undertaken by citizens across the nation. would be the best prepara-
tion Ior retirement. The problem is that those who save and invest
are asked to provide Ior those who don't. (Remember the Iable oI the
grasshopper and the ant?) The ever-increasing burden oI local. state
and Iederal taxes reduces even the willing ant's ability to save and in-
vest. So sad as it may appear to some oI us. the truth is that the pru-
dent. popular and in many cases the only way to provide adequately
Ior one's retirement is to rely on: (1) selI. (2) employment related
plans and (3) government programs (social security). (1) Was
discussed in Section III oI this book relating to investments in general
and in Section I where skills and personal abilities were analyzed. In
this chapter individual IRA and Keogh plans are introduced. (3) Has
been taken care oI in the supplemental reading list at the end oI this
chapter. Many excellent books have been written anticipating your
questions concerning our social security system. The main emphasis
oI this chapter is on (2) "employment related programs."
181
PENSION PLANS
Pension plans are a way oI distributing an employee's compensation
over his entire liIetime. even aIter he has stopped working. In the
past. most pension plans were "unIunded." which meant that retired
employees were paid beneIits out oI a company's current earnings.
Presently the maiority oI pension plans are "Iunded." the Iunds being
set aside in a trust to grow and accumulate enough assets to take care
oI already retired workers and those getting ready to retire. Some
plans provide Ior early retirement with reduced beneIits but usually
beneIits are not increased iI one elects late retirement and some plans
even mandate retirement at a certain age.
A "qualiIied" plan is one which meets certain minimum standards
established by ERISA (Employee Retirement Income Security Act oI
1974) and by doing so oIIers several tax advantages to the par-
ticipants. The employee deIers taxes until beneIits are actually
received upon retirement and meanwhile they continue to multiply
in a tax-sheltered environment. The employer takes a current tax
deduction Ior his contributions as they are made.
VESTING
In contributory plans where the employee pays a portion oI the cost.
iI he should terminate his employment beIore retiring he is entitled to
a reIund in the amount oI his contribution. What. iI any. portion oI
his employer's contribution he is entitled to depends upon the vesting
provisions oI that particular plan. (Vesting means employee's right
to beneIits.) Some plans provide Iull vesting aIter ten years on the iob
and none beIore that time. Others allow Ior 25 vesting aIter Iive
years. an additional 5 per year Ior the next Iive years Iollowed by
Iive years oI 10 vesting per year. It takes IiIteen years Ior Iull
vesting instead oI ten but at least iI you terminate your employment
at the end oI nine years you've got something to show Ior it Irom the
employer. Another option is reIerred to as the "rule oI 45." AIter a
minimum oI Iive years employment the employee is awarded 50 oI
his pension rights when the number oI years oI employment plus the
employee's age equals 45. Example: six years oI service by a 39-year-
182
old employee would result in 50 vesting. Another way to achieve
50 vesting is by ten years oI employment with no regard to age. For
example. a thirty-year-old who had been with the company ten years
would be 50 vested. Everyone is considered Iully vested aIter IiI-
teen years under the "rule oI 45" option. These are the minimum ac-
ceptable vesting provisions allowed by ERISA but more liberal plans
exist.
DISABILITY
Many private pensions also provide Ior disability. Some grant
beneIits at an actuarily reduced rate iI an employee is Iorced to retire
early Irom his iob because oI a permanent disability. Others allow
beneIits to accumulate iust as iI the employee were still on the iob and
then pay Iull retirement beneIits when the disabled employee reaches
normal retirement age. Another way to handle the situation is to pay
so much a month Ior each year oI service or to provide an immediate
beneIit as a percentage oI the salary the employee was receiving at
the time oI his incapacity. These provisions should be checked in
your own plan as there is a great deal oI variation and eligibility re-
quirements are not standardized.
THREE BASIC TYPES
Pension plans may be divided into three main categories: (1) the
defined-benefit plans which are most attractive Irom the employee's
point oI view because they commit the employer to provide deter-
minable. speciIic beneIits; (2) the monev-purchase plans iri which
there are deIinite mandated employer contributions and J:he
employee receives whatever beneIits his pension account wUIcpur-
chase at the time oI his retirement and (3) the target-plans.which
make no Iirm commitments or enIorceable promises but try to pro`
vide certain beneIits.
DeIined-beneIit plans promise Iixed beneIits under various Ior-
mulas. Under the Ilat-amount Iormula all employees meeting some
minimum qualiIications receive the same exact beneIits. The Ilat-
percentage Iormula relates beneIits strictly to a percentage oI earn-
183
ings whereas the Ilat-amount-unit-beneIit Iormula concerns itselI
with years oI service. A predetermined Ilat amount is given Ior each
year oI employment. A variation oI this. called the percentage-unit-
beneIit Iormula awards a percentage oI 1 or 2 oI one's Iormer
salary instead oI a Ilat amount Ior each year oI service.
With the enactment oI ERISA in 1974 the commitments demand-
ed oI employers were expanded to the point where a Iailure to live up
to such a commitment could threaten the very liIe oI a company.
ERISA demanded among other things. earlier eligibility. Iaster
vesting. minimum Iunding. amortization oI Iunding deIiciencies. in-
surance oI beneIits and contingent liability oI up to 30 oI the entire
net worth oI a company iI a company ever wanted to terminate a
plan. Such legislation naturally discouraged deIined-beneIit plans by
making the cost prohibitive.
An analogy comes to mind: Everyone would agree that puriIied
water is desirable and worth paying a high price Ior. but at some
point removing the last bit oI relatively harmless impurities would be
so costly that a company could not stay in business and water would
be denied completely to such demanding consumers. The standards
set by ERISA are also desirable but wouldn't deIined-beneIit plans
with a Iew "impurities" have been better than none at all? Many
employees now think so. Because oI ERISA's exaggerated demands.
almost 30 oI all plans were terminated in the 1970s. More and
more companies switched to target and money-purchase plans where
the employee is at the mercy oI the investment market. Decreases in
trust assets are now the employees' risk not the employers' who
under the deIined-beneIit plans had to increase their contributions iI
trust assets decreased in value below a certain level.
I'm reminded oI something Winston Churchill once said: "Some
see private enterprise as a predatory target to be shot. others as a cow
to be milked. but Iew are those who see it as a sturdy horse pulling
the wagon."
PROFIT SHARING PLANS
Businesses with Iluctuating income oIten preIer to relate their retire-
ment plans to proIits rather than payroll. ProIit sharing plans are
184
believed to give the employees a personal interest in the business and
to draw management and employees closer together. The employer
takes a tax deduction Ior all contributions made to the plan and the
employee gets Iull 100 credit Ior all such contributions which com-
pound tax Iree until withdrawn. Several years ago proIit sharing
plans were responsible Ior making many employees Iairly well-oII. It
was a combination oI large contributions by both employer and
employee plus the appreciation oI the Iund's capital and the
IorIeiture oI unvested portions oI accounts oI ex-employee par-
ticipants. But lately no one has gotten rich Irom proIit sharing plans.
In a great maiority oI cases employer contributions have trickled to
almost nothing. the employee has been hard pressed to make ends
meet let alone put aside Ior his retirement and on top oI that the
Iunds have done poorly showing losses rather than gains in the
unsteady market oI the past Iive years.
A desirable Ieature oI most contributory plans is that they oIIer
either loan or withdrawal beneIits or a combination oI both.
Distributions are legally permitted aIter two years but each plan has
its own unique restrictions. Some plans only allow withdrawals oI
employee contributions. others restrict withdrawals to a percentage
oI the amount vested and then only in an emergency situation. A
loan rather than a withdrawal is preIerable because borrowed Iunds
are not considered income and are thereIore not currently taxed as
withdrawals would be. Not only that. the employee can deduct Irom
current income taxes the interest paid on the loan.
STOCK PURCHASE PLANS
Under one version oI this plan all employees (non-discriminatory)
meeting certain qualiIications are permitted to buy company stock at
a discount oI up to 15 .
Under the Economic Recovery Tax Act oI 1981 (ERTA) incentive
stock option plans can also be made available on a discriminatory
basis to certain employees. usually the highly paid executives who
would preIer the tax beneIits such a plan oIIers over an increase in
current compensation which would be taxed as ordinary income.
These incentive plans have requirements which must be met: the op-
185
tion price is not a discount (as in the non-discriminatory plans) but
must equal or exceed the value oI the stock as oI the option date; the
option must be exercised within ten years and the value oI the stock
Ior which options are granted cannot exceed more than $100.000 in
any one year. Taxes are paid only when the stock is sold and usually
at capital gains rates which means 60 tax-Iree.
SERFS
Supplemental Executive Retirement Plans (SERPS) are another Iorm
oI deIerred compensation which were initiated to pay additional
beneIits to top level excutives in order to increase the level oI retire-
ment income beyond that contemplated by the basic retirement
beneIit plan Iormula.
EMPLOYEE STOCK OWNERSHIP PLANS
(ESOPS)
In order to encourage use oI ESOPS. ERTA provided a tax credit
against payroll Ior companies adopting them. A corporation
establishes an employee stock ownership voting trust which borrows
money on the employers' guarantee and uses that money to buy
company stock. The corporation makes tax-deductible contribu-
tions to the trust which in turn covers the loan payments. In this way
the company ESOP can raise capital by purchasing company stock
with borrowed Iunds. The company then pays oII the loan with tax
deductible dollars. BeneIicial ownership oI the stock passes to the
employees according to a set vesting plan but actual possession re-
mains with the trust to grow in a tax-Iree environment until retire-
ment. Employees may be required to grant a Iirst right oI reIusal to
the company at Iair market value beIore selling outright to a third
party and the trust or employer company may be required to pur-
chase securities that cannot be sold at a Iair price based on a time and
valuation Iormula on the open market; in reality a "put option."
The idea behind ESOPs may be best expressed by an anecdote: A
wealthy capitalist employer put up with the outspoken radical
politics oI a certain employee because that employee did an excellent
186
iob. The employee continually attended meetings oI Ianatical groups
and reported their activities and spouted slogans to everyone in the
oIIice Iollowing such meetings. One Thursday aIter attending the
usual Wednesday night communist group session. the employee was
strangely silent. The employer questioned him and discovered the
employee would no longer be attending those meetings. "What hap-
pened?" asked the employer. "A speaker told us that iI all the wealth
in this country were equally distributed tomorrow. each person
would have $5.000." "Well-------?" prompted the employer. "I have
$10.000 saved." blurted the employee.
A large portion oI our society is deprived oI power because they
Iind themselves living oII and at the mercy oI other people. Louis
Kelso. the originator oI ESOPs. believes this is one oI the most
destructive Iorces working against the overall economic health oI our
nation. People who have no real stake in producing wealth beyond
wages are not living up to their potential. The ESOP theory holds
that iI everyone had a "piece oI the action." in this case a capital in-
vestment in the company. our entire economy would beneIit.
TAX-SHELTERED ANNUITIES (TSA)
TSAs are excellent programs Ior retirement planning but unIor-
tunately they are available to only a Iew people. To participate one
must be employed by public schools or tax-exempt institutions
organized speciIically Ior educational. scientiIic. religious or chari-
table purposes. The participants can purchase annuity contracts.
retirement income insurance policies or mutual Iunds all with bef ore-
tax dollars. Up to 20 oI an eligible employee's salary can be put in-
to a TSA. When withdrawn at retirement or sooner the beneIits Irom
a TSA are taxed at ordinary income rates.
THRIFT OR SAVINGS PLANS
A derivative oI the other employee beneIit plans is the thriIt or sav-
ings plan. The employer's contributions are based either on company
proIits or the employees own aIter-tax contributions. OIten the
employers' contribution escalates with length oI service. (For in-
187
stance. 50* on a dollar Ior the Iirst Iive years and then matching
dollars Irom then on.) Remember the employee is not taxed on the
employers' contributions so that amount together with his own con-
tributions compound in a tax-Iree environment. The employees' con-
tribution is mandated by the plan and should be set at less than six
percent oI compensation is required then the Internal Revenue Ser-
vice considers this to be presumptively (can be reIuted with Iacts) a
showing oI discrimination in Iavor oI the highly compensated par-
ticipants in the plan. The reasoning here is that the lower paid
employees are having trouble iust making ends meet and iI contribu-
tions are set at too high an amount they will not be able to participate
and the plan will beneIit only the top salaried employees.
SIMPLIFIED EMPLOYEES PENSIONSSEPs
In 1978 Congress decided pension plans needed to be simpliIied so
came up with an IRA Iormat subiect to special rules. SimpliIied pen-
sion plans allow the employer to contribute to an employee's account
the Keogh limits (in 1983 15 percent oI an employee's salary or
$15.000). The plan contemplates simpliIied employer reports with
signiIicant reduction in the amount oI paperwork required.
SALARY REDUCTION PLANS
II you should happen to work Ior a company that has a salary reduc-
tion plan. you might iust have the best oI all possible worlds. There
aren't many around iust yet but more and more companies are think-
ing along this line. Like the savings plans. a portion is withheld Irom
your salary but these dollars being invested Ior your beneIit are pre-
tax dollars!
Each company sets its own limits on how much an employee can
"sock away" (2-10) and most companies do some Iorm oI
matching. Although the name doesn't imply this. the Iact is it is
possible to take home more dollars aIter the deduction because the
investments may put you in a lower tax bracket with less
withholdings required Irom your adiusted pay check. This plan is
especially good iI you expect to leave the company in a Iew years
188
because there is no penalty Ior withdrawal in such a case although
you cannot withdraw sums Ior other reasons without a tough prooI
oI Iinancial hardship. You must take the money with you when you
leave the company and you can use the "ten year averaging" or "roll
over" within sixty days.
KEOGH OR HR-10 PLANS
Under the Keogh Act oI 1962. amended by ERISA in 1974 and then
again in 1981. a selI-employed unincorporated individual may set
aside before taxes each year. 15 oI earned income or $15.000.
whichever is less. In 1984. those limits will be raised to 20 with a
$30.000 maximum.
Employees putting 1.000 hours or more into the business must be
covered iI they have been employed three years and at least 7Ji
must be contributed by the employer to the account oI any employee
making over $100.000. Vesting is immediate and all proceeds oI his
account can be "rolled over" to an IRA (discussed below) upon leav-
ing the business.
The money in selI-directed plans can be invested in almost
anything except hard assets such as diamonds and precious metals
Ior instance. Mutual Iunds are a popular choice. Many banks and
brokerage houses have investment plans set up especially Ior Keogh
accounts. You are not taxed on the capital or its earnings. which
compound in a tax-Iree environment. until the Iunds are withdrawn.
which cannot be beIore age 59 Ji without penalty and must begin by
age 70J2. Distributions may take the Iorm oI an annuity but lump
sum distributions may avoid the alternative minimum tax by electing
a special 10-year-averaging option. (Alternative minimum tax and
10-year averaging are discussed elsewhere.) DeIined-beneIit Keogh
plans have been available since 1974 but because oI actuarial costs
and complications they are rarely used.
The Iollowing example illustrates how great an advantage it is to
be able to invest with before-tax dollars:
Mr. Dim and Mr. Bright. both age 45 and in the 39 tax bracket.
decide they can aIIord to put $6.000 a year aside Ior their retirement.
189
They both anticipate a 10 earnings on their investment. Mr. Bright
uses a Keogh Plan and Mr. Dim does not. The chart below shows
who will have the more careIree retirement.
MR. DIM
age contribution taxes earnings worth
45 $3.660 $143 $366 $3.883
50 3.660 998 2.559 27.155
55 3.660 2.148 5.509 58.446
60 3.660 3.695 9.474 100.517
65 3.660 5.774 14.805 157.084
MR. BRIGHT
45 $6.000 $0 $600 $6.600
50 6.000 0 4.629 50.923
55 6.000 0 11.119 122.306
60 6.000 0 21.570 237.268
65 6.000 0 38.401 422.416
Without the beneIit oI a Keogh. poor Mr. Dim immediately had to
pay $2.340 (39 oI the $6.000 he put aside Ior retirement) in taxes so
he began his investment program behind Mr. Bright who was always
able to invest the entire $6.000 he chose to put aside without its Iirst
being subiect to taxation. On top oI this all the interest Mr. Dim
earned was taxed each year at the 39 rate the end result being that
Mr. Bright had $265.332 more than Mr. Dim to ease his retirement
years entirely thanks to his Keogh plan.
Perhaps you should try to qualiIy! II you are selI-employed in
even a part-time business as long as you don't incorporate you may
be eligible. It's worth discussing with your attorney or other adviser.
don't you think?
190
IRAINDIVIDUAL RETIREMENT ACCOUNTS
In 1975 IRAs were available to employees whose companies did not
ave a retirement or pension plan they could ioin. Thanks to the ER-
TA (Economic Recovery Act oI 1981) now every working person can
each year put $2.000 into a tax-deIerred IRA. The only requirement
is that the income be earned. i.e. a salary as opposed to interest. divi-
dend or legacy income. The beauty oI the IRA is the chance to have
interest compounding over time with no taxes due until the money is
withdrawn.
Most accounts are opened by people in the 45-54 age group but
an IRA is the best deal Ior those in their twenties because the Iurther
you are Irom retirement the more the IRA's tax-deIerred compound
interest can do Ior you. For example: II X opened an IRA at age 25
and began investing $38.46 a week (within the annual allowance oI
$2.000 Ior a single person). at 12 compounded annually he would
have $1.718.285 by the time he was 65 years old. That's the miracle
oI compounding over a Iorty-year period!! II on the other hand. Y
waited until he was 50 years old to open his IRA. even though he
were to make the same contributions oI $38.46 a week at 12 in-
terest compounded annually. by the time he was 65 he would have
$83.507. Not to be scoIIed at. but still the advantage oI starting early
cannot be overemphasized when it comes to tax-deIerred com-
pounding. (Remember Mary and Sue in Chapter FiIteen?) OI course.
inIlation may put a damper on your expectations oI what being a
millionaire will mean in 40 years. It may well be that bread will cost
over $100 a loaI! But even though you may not live like a king.
thanks to your IRA you may be able to remain at your pre-
retirement level oI comIort without the sacriIices retirement so oIten
entails.
II only one spouse works. the couple together can contribute
$2.250 but there must be a separate account opened Ior each spouse
and the $2.250 can be divided any way you choose; halI in his ac-
count and halI in hers as long as no account has more than $2.000
contributed in any one year. It is not necessary to contribute every
year nor is it essential to contribute the Iull $2.000 or $2.250any
amount up to that is Iine. II both spouses are working then each is
191
allowed to contribute $2.000 to his/her own account which is really
a total oI $4.000 a year per couple.
Some companies have payroll plans where so much is automati-
cally deducted Irom your pay check and put into an IRA. This is an
excellent way Ior someone to save who otherwise would not have
the discipline to do so. It is relatively painless and very convenient.
The IRA Iund must not be disturbed until you reach age 59 Ji. II
money is withdrawn beIore that time there will be taxes due on the
amount withdrawn plus a 10 penalty. However. IRA Iunds may
be transIerred Irom one qualiIied institution to another as oIten as
you wish with no penalties. II you wish to move the Iunds yourselI
they must be placed in another IRA account within 60 days or the
above mentioned penalties will be assessed. Moving the Iunds
yourselI rather than having an institution arrange the transIer is call-
ed a "roll-over" and only one "roll-over" is permitted each year. Un-
cle Sam has not Iorgotten about his share oI all that money ac-
cumulating in your IRA and to make certain he gets his share you
must start withdrawing your Iunds when you reach age 70 Vz. The
withdrawal can be made all at once in a lump-sum. in which case Un-
cle Sam is right there to levy taxes on the entire amount. At any rate
there is a minimum amount which must be withdrawn when you
reach 70
x
/z and on a schedule which according to actuarial tables
would assure the depletion oI the Iund during your liIe span. OI
course. the amounts withdrawn can be reinvested in any number oI
entities but not another IRA. Failure to withdraw the proper amount
results in a penalty equal to halI the amount you should have
withdrawn.
In spite oI these stiII penalties. which you should take care to
avoid. an IRA is an extremely good investment. You can open IRAs
at banks. savings and loans. credit unions. brokerage houses. mutual
Iunds and insurance companies and also at some work places. You
cannot invest in precious metals. liIe insurance or collectibles. but
that leaves bank certiIicates. money-market Iunds. bond annuities.
treasury notes. real estate limited partnerships. stocks. mutual Iunds.
and many. many others; a pretty wide choice. However. like the
purchase oI liIe insurance when there are numerous choices it is time
Ior selI-analysis. preIerably with some proIessional help. I will
192
attempt to give you brieIly some guidelines. Your own personal ob-
iectives will depend on your age. Iinancial circumstances and
temperament.
II you preIer a place Iree Irom worry and decision making. look
into a bank. savings and loan or credit union. They have proIes-
sionals managing the Iunds and your account is insured by the
government up to $100.000. Make sure you open another IRA
whenever the $100.000 mark is reached with any one account so you
will get the complete government insurance coverage. You can have
as many IRAs as you want iust as long as you do not put more than
$2.000 oI newly earned money in the combination oI all the accounts
in any one yearyou can transfer any retirement Iunds (old dollars)
you want. The only decision that must be made is whether you will
choose a Iixed or variable interest rate. You should consider a Iixed
interest rate only iI you Ieel interest rates will Iall during the term
your Iunds will be "locked in." That way you will be assured oI the
high rate oI return you anticipated when you invested your money.
Ior a 30-month term. Ior instance.
The only meaningIul way to comparison shop is to request the eI-
Iective annual yield. Interest is compounded in many ways; yearly.
quarterly. monthly. weekly or daily. For instance. a simple (not
compounded) interest rate oI 14.375 might yield the same income
as a 13.25 rate which is compounded daily. The eIIective annual
yield is very important so shop careIully. Don't open an IRA any
place where they won't tell you the annual eIIective yield.
The main drawback to opening an IRA with a bank oI savings
and loan. is that iI you should need to withdraw your Iunds Ior an
emergency there are heavy withdrawal penalties. These penalties are
on top of the taxes which become due on withdrawal and the IRS
10 penalty.
Even though money market IRAs are not insured they are
relatively secure. especially iI invested in treasury bills or govern-
ment bonds. Not only can the account be moved around without
penalty. but the charge to manage your IRA in a money market
would only amount to about $10 per }Iear.
With a mutual Iund group you can speculate and iI you are
young enough. aIIord to make some bad iudgments knowing you
193
have the time to recoup any losses. The advantage here Ior someone
who has or wants to acquire the skill and has the time and tempera-
ment is that you can switch the Iunds as the economy and your own
personal Iinances change. You avoid getting locked into one type oI
investment by ioining a large Iund group with ample diversity. In a
no-load Iund you deal directly with the company or transIer agent
with no commissions involved as opposed to a load Iund where
shares are sold through a broker who charges a commission.
An insurance company IRA is an annuity and you must weigh
the saIety. Iees involved and investment potential careIully.
You can always open a "selI-directed" IRA but it must be with a
brokerage house as you must have an IRA Trustee. The only people
who might want a selI-directed IRA are proIessional investors who
believe they could handle the investment Iunds better than any other
manager. However. they would be Iaced with high Iees in the Iorm
oI commissions and. oI course. the energy and time involved in selI-
managing the Iunds rather than leaving that to proIessionals
employed by the other IRA institutions.
In the Iinal analysis. however. you could Iind that an IRA is not
right Ior you! II you have only limited Iunds you must choose what
to do with your savings dollars and it could well be that a savings
plan where you work could be the best idea. II the company matches
more than 25 oI your contributions then even iI the savings is ac-
complished with your aIter-tax dollars you would be ahead oI the
typical IRA. Remember brokers and Iinancial advisers don't get
commissions by recommending your company's savings plan! Look
out Ior yourselI!
MUNICIPAL AND OTHER TAX-EXEMPT BONDS
The Iinal alternative to an IRA is open to everybody; municipal and
other tax-exempt bonds and Iunds. OI course. they pay less interest
than the taxable investments but they are great iI you are in a high
enough tax-bracket so that being tax-exempt weights the investment.
This type oI investment might be a winner iI you are pretty certain to
need to withdraw the savings beIore age 59 V2.
194
SUMMARY
Many pensions plans today are money-purchase or target plans
where the ultimate beneIit to the participants depends on investment
experience. Consider yourselI one oI the lucky ones iI yours is a
deIined-beneIit pension plan.
Because business has been "oII" the last Iew years. proIit sharing
plans have not been very attractive. In many instances. management
struggled heroically iust to keep employees on the iob without wor-
rying about sharing non-existent proIits. Still the Iact that beneIits
are permitted to be withdrawn or borrowed against aIter only two
years participation in a proIit sharing plan is an intriguing Ieature oI
such plans.
The various stock ownership plans. deIerred compensation
plans. specialized TSAs and ThriIt plans all have their good and not-
so-good Ieatures. The best idea oI all is to have an IRA and the tax-
exempts and company or Keogh plans if you have that much money
you can iust put aside Ior savings. Most oI us have to make a choice
because we're lucky to be able to get $2.000 each a year that isn't
sorely needed Ior creditors or necessities currentlv. Just remember
you can have an IRA and these other plans iI you should ever have
more than $2.000 to save. Never. never again think oI the old piggy
bank or pass book savings account when there are so many places to
let your money work Ior you! The laws are changing constantly and
the ceilings and rules applicable in 1982 will be outdated in 1984 in
some instances so do your homework (books again) and iI anything
isn't crystal clear consult a proIessional.
II you are an employee. the main thing Ior you to remember is
that ERISA (although in my opinion it may have wounded the geese
that lay the golden eggs) was enacted Ior your beneIit. You should be
able to get Irom your pension plan administrators a special summary
oI your retirement plan in easy-to-understand language. Armed with
this inIormation tackle the worksheet which Iollows.
The world may be your "oyster" but it's up to you to pry it open!
195
WORKSHEETCHAPTER SIXTEEN
WHAT YOU SHOULD KNOW ABOUT YOUR
EMPLOYMENT-RELATED RETIREMENT PLANS
This will take some research on your part but the answers to
these questions will simplify your planning in this area. Write
all the information you come up with in your notebook.
1. How many years on the job are required before you qualify
for a pension?
2. Will the time you put in before the plan was initiated count
towards determining the number of years worked?
3. Can these years be cumulative (leave or lay-offs OK) or
must they be continuous years worked?
4. How long do you have to work each year to have the year
included as credited service?
5. s there an age requirement?
6. How do you apply for benefits?
7. How are your benefits determined?
fixed amount?
number of years worked?
amount of compensation received?
combination?
8. Are you obligated to contribute a part of your salary to the
plan on an annual basis?
196
9. How much will the employer contribute? Does that contri-
bution involve your savings as well as the company's profits?
10. Can you invest the savings and the company's contribu-
tions in different types of investments? Company stock? A
portfolio of growth stocks or long-term bonds?
11. Are you able to withdraw the full value of your own sav-
ings and the accumulated income whenever you want?
12. How long must you wait until you can withdraw your por-
tion of the company's contributions? Are you penalized for
withdrawals? Must you wait until you leave the company?
13. What are your benefits if:
job terminates now due to lay-off, fired or company
bankruptcy?
you change jobs now?
you become disabled?
you retire early?
you reach retirement age?
14. Are benefits tied in some way to cost-of-living? How?
15. s your plan insured? Fully?
16. s your plan integrated with social security? What is the
formula?
17. What kinds of survivor's benefits does your company of-
fer? Can your beneficiary receive benefits guaranteed until
his or her death?
18. s it necessary to give up a part of your normal pension in
order to receive survivors' benefits in case of your death?
197
19. Must you opt for survivors' benefits before your retire-
ment? How long before retirement must you choose?
20. What benefits are available to your beneficiary if you die
before retirement?
RECOMMENDED READING
CHAPTER SIXTEEN
The ABCs of IRAs. by William Grace. Jr.
Evervthing You Should Know About Pension Plans. by Fay and Leo
Young
You & Your Pension. by Ralph Nader and Kate Blackwell
The Coming Revolution in Social Securitv. by Haeworth Robertson
Social Securitv & Pensions in Transition. by Bruno Stein
Social Securitv. The Fraud in Your Future. by Warren Shore
Policv Making for Social Securitv. by Martha Derthick
Social Securitv Overpavments. by Peter Trozan
Social Securitv. by Robert J. Myers
The Complete & Easv Guide to Social Securitv & Medicare. by
Faustin Jehle
Your Complete Guide to IRAs & Keoghs. by Jack Egan
Write to: The Pension Rights Center
1346 Connecticut Avenue N.W.
Washington. D.C. 20036
198
How to
Take Benefits
In chapter seven we discussed the various ways to receive insurance
proceeds. Proceeds Irom pension and other retirement plans require
the same type oI analysis and involve many oI the options Iaced in
chapter seven.
Many people. in an attempt to provide Ior a spouse. choose to
receive the smallest amount oI income while they are living. with the
expectation that they will die Iirst and there will be more Iinancial
security Ior a loved one. What happens iI the spouse dies Iirst? You
are stuck with lower payments than you are entitled to and the com-
pany is the winner.
In a maiority oI cases it would be better to take the "extra" (diI-
Ierence between high and low pay out options) and buy a term liIe in-
surance policy with a portion oI it to provide Ior the surviving
spouse. In that way. even iI your spouse dies Iirst. you are still entitl-
ed to the highest (100) pay-out and on his or her death you can
simply cancel the term policy on your own liIe.
OI course. one valid reason Ior taking less than 100 oI your
pension might be the Iact that you are uninsurable and your spouse
has no other protection (not a very common situation).
Under ERISA (Employee Retirement Income Security Act) the
normal annuity Iorm is at least a ioint and one-halI survivor annuity
199
unless the covered employee does something about it. II you want a
single liIe annuity you must elect it under the rules set Iorth in your
pension plan. Just consider the Iollowing example beIore deciding.
SINGLE LIFE ANNUITY
Xavier and Yvonne. both retired Irom their iobs and elected to take
100 oI their beneIits with no survivorship rights. Xavier was entitl-
ed to $500/month or $6.000/year and Yvonne was entitled to
$400/month or $4.800/year. They drew pensions Ior ten years
receiving a total oI $108.000 in that time.
JOINT AND ONE-HALF SURVIVOR ANNUITY
Abigail and Bruce were co-workers oI Xavier and Yvonne and
retired at the same time but decided to take the 50 payment with
survivor beneIits. Abigail was entitled to $500/month or
$6.000/year and Bruce was entitled to $400/month or $4.800/year
but they each received halI or together $54.000 over a ten year
period.
At the end oI the tenth year Xavier and Abigail both died. Yvonne
received $400 instead oI sharing the $900/month as beIore. while
Bruce continued to receive $450 as always. Bruce and Abigail both
died at the end oI another Iive years. Their respective beneIits Irom
the company had been:
Yvonne Bruce
IstlOyrs....................... $108.000 $54.000
next5years................... $ 24.000 $27.000
$132.000 $81.000
A study oI the opposite page will show that even though both couples
were entitled to the same pension dollars. Xavier and Yvonne. who
chose the pure annuity. came out ahead in this example.
200
PURE ANNUITY Vs. 1OINT & LAST
SURVIVOI
I ANNUITY
Xavier Yvonne Abigail Bruce
monthly monthly
payments on payments on
100 pure $500 $400 50 $250 $200
annuity Ior x 120 months x 120 months annuity Ior x 120 months x 120 months
ten years $60.000 $48.000 ten years $30.000 $24.000
Xavier dies Abigail dies
Yvonne lives 0 $400 Bruce lives $250 $200
another
x 60 months
$24.000
another
Iive years
x 60 months
$15.000
x 60 months
Iive years $ 0 $12.000
Total. . . $60.000 $72.000 Total... $45.000 $36.000
$132.000 $81.000
The choice is vours'
HOW DISTRIBUTED
LUMP-SUM
A lump-sum distribution must be made within one year and must
consist oI everything the employee is entitled to with no credit re-
maining in the plan. The portion attributable to the employee's
pre-1974 (ERISA) service is taxable as long-term capital gain. The
part due to services Irom 1974 on is taxed as ordinary income. It can
be divided by ten and then have the applicable single-individual-rate
tax table applied (even iI the employee is married with dependents.)
The resulting Iigure is then multiplied by ten to Iind the tax. The Tax
ReIorm Act oI 1976 gave the participant a new election to treat both
portions. pre- as well as post-1974. as ordinary income subiect to the
ten-year-averaging Iormula. This gets more complicated than I have
stated and is something to bring up with your accountant. Where
contributions are made by an employee they are made with aIter-tax
dollars and are not thereIore taxed again upon distribution. II the
distribution is made to a sole beneIiciary. upon the employee's death
there is a special employee death beneIit you should be aware oI. The
Iirst $5.000 oI the otherwise taxable beneIits are received by the
beneIiciary free oI all taxation.
II the proceeds are to be kept out oI the deceased employee's
estate (Iree oI Iederal estate taxes) the beneIiciary must waive the tax
advantages normally accorded such a lump-sum distribution. name-
ly capital gains treatment and ten-year-averaging. The choice oI hav-
ing the proceeds taxed as ordinary income but kept Iree oI estate
taxes or having the ten-year-averaging and capital gains advantages
applied to the proceeds and subiecting them to possible estate taxa-
tion. can only be made by analyzing each individual case to deter-
mine which election would result in the greatest tax savings. Any
death beneIits attributed to the employer's contributions are not in-
cluded in a deceased employee's estate. More will be said about estate
taxation later.
II you change iobs and receive the pension beneIits that you are
entitled to (vested) Irom your old iob. you can keep them and do
what you like with them but they are taxed as ordinary income dur-
ing the year received with no special treatment allowed. II you want
202
to avoid such taxation. you can. within sixty days oI receipt. reinvest
the proceeds in an IRA account without tax consequences. This is
called a "roll over." Partial roll overs are allowed with means you can
keep and be taxed on a portion oI the distribution and reinvest the
rest within the sixty day limit.
ANNUITY
Annuity distribution is a term applied to all ways oI receiving
beneIits other than in a lump-sum. InIlation prior to 1983 wreaked
havoc with the purchasing power oI retired persons receiving
payments Irom a Iixed dollar annuity so new variations oI the Iixed
annuity were developed. Some plans attempted to tie annuities to
some sort oI price index so the purchasing power oI the retiree would
remain relatively constant. The variable annuity plans have the same
goal and attempt to win their battle over the erosion oI the pension
dollar by investing pension contributions in a segregated portIolio oI
equity securities; the idea being that there is a correlation between
the cost oI living and the perIormance oI a diversiIied portIolio oI
common stocks and other equity investments. OI course. the
possibility oI greater growth is accompanied by greater risk and
possible loss oI capital.
Your premium dollars purchase "units" whose value Iluctuates
with the market. ThereIore. you. as annuitant. assume the invest-
ment risk when purchasing a variable annuity but the company is
guaranteeing that you will not outlive your income in terms oI an-
nuity units; it's iust that those units may not be worth enough to live
on! On top oI this. insurance companies charge sales Iees. sometimes
up to 8 oI each contribution. and management Iees usually totaling
Jz to 1 annually oI the Iund's net asset value.
In non-contributory plans. since the employer has contributed
untaxed dollars to the employee's account. on distribution all the an-
nuity payments will be taxed at ordinary income rates. The rules are
rather complicated where contributory plans are concerned. Basical-
ly. the person entitled to the annuity Iigures the ratio oI his invest-
ment in the plan to the anticipated return Irom the plan and excludes
a like proportion oI every annuity payment Irom his gross income.
203
This is reIerred to as the exclusion ratio. Your accountant or other
tax proIessional can give you more details.
There is a simpler alternative though. II an employee in the Iirst
three years. receives an amount which is the same or more than his
investment in the plan. he can exclude those payments Irom his gross
income. Then. beginning with the Iourth year. he simply treats all oI
the Iuture payments as gross income.
PROS AND CONS OF ANNUITIES
Annuities are a gamble that you will outlive your resources. II you
have acquired a signiIicant amount to work with and are a prudent
investor. it is a gamble that would be hard to win. For example. iI
you invested $100.000 at 10 you could pay yourselI $10.000 a year
indeIinitely. The withdrawal would equal the income earned and the
capital would constantly remain intact. (OI course. I am using a
Iairy-tale world oI no taxes!) II you were to raise the disbursement to
yourselI without increasing the earning power oI your principal at
the same time. your reserves would eventually dry up. But even by
increasing your spendable proceeds by $2.000 a year ($10.000 to
$12.000) the principal would last Ior eighteen years! On the other
hand. iI you were to keep your requirements steady at $10.000 a year
and were able to obtain better than a 10 return on your original
capital oI $100.000 your principal would begin increasing each year.
WHEN DOES DISTRIBUTION TAKE PLACE
Distribution can occur at normal or early retirement. when the
employee changes iobs. is disabled or dies or iI the plan itselI is
discontinued. Additionally some distribution can occur during an
employee's illness. to pay medical expenses beIore or aIter retirement
and even during periods when the employee is laid-oII.
Disability causing premature retirement is planned Ior in some
pension plans. There are various options: The disabled. under one
option. can retire at an actuarily reduced level; another allows Ior a
kind oI severance pay based on a percentage oI an employee's past
earnings; or pension credits can continue to accumulate with the
204
passage oI time as iI the employee were still on the iob and his Iull
retirement beneIits would begin at normal retirement age.
SUMMARY
As you may have guessed. I do not Iavor annuities. even the "new
improved" kinds. However. I'm sure your insurance agent will make
a good case Ior the other side. ThereIore. with an awareness oI my
own bias and Irom a sense oI iustice I recommend you discuss the
subiect with your agent beIore making any decisions. Remember. to
ask yourselI iust what personal interest the advisor may have in your
decision; will he stand to gain iI you decide one way or the other? In
the long run. it's all up to you. You may Iind it helpIul to post the
Iollowing sign seen in a New York caIeteria on your desk or wall:
"Courteous and efficient self-service."
205
WORKSHEETCHAPTER SEVENTEEN
HOW TO TAKE BENEFITS
Read each statement and put a true or false after it.
1. n my family several members have lived past the age
of seventy.........................................................................._____
2. don't mind the sales and management fees which
accompany some annuities..............................................._____
3. My retirement plan is a contributory plan......................_____
4. don't want responsibility when retire........................._____
5. expect to live beyond the normal life-span.................._____
6. am uninsurable..........................................................._____
7. don't think could invest my money to keep ahead
of inflation.........................................................................._____
8. My spouse is not the beneficiary of any insurance on
my life................................................................................
..........................................................................................
9. like to feel am being taken care of............................_____
10. My spouse has no independent assets.......................
11. don't like to manage my own investments................
f you answered with a True in nine or more cases annuities
are right for you.
f you answered with a FALSE in seven or more instances
considertaking the proceeds in a lump-sum and investing
for your own account.
f you came out somewhere in the middle ask some more
questions, do some reading and give your circumstances
a little more thought.
206
RECOMMENDED READING
CHAPTER SEVENTEEN
Monev for vour Retirement. by John Barnes
Personal Financial Survival. by Brownstone & Sartisky
Inflation Proofing Your Investments. by Browne & Coxon
Can We Afford Earlv Retirement? by Frank Kleicler
Your Retirement Income. by James Jorgensen
Personal Financial Planning. by Amling & Droms
Monev & Retirement. by LeClair-Leimberg-Chasman
The Star Spangled Retirement Dream. by James Gollin
Creating Promise Out of Threat. by Robert Kinzee
207
18
Older
Achievers
This chapter has nothing whatsoever or evervthing to do with retire-
ment planning. depending on your point oI view.
One oI my dearest Iriends is in Iairly good health as she nears the
century mark but Ior several years she has shown little interest in liv-
ing. Usually when that occurs psychologists tell us a person's health
deteriorates and they do in Iact die. The mental outlook oI my Iriend
has not seemed to harm her health at all but oI course worries those
around her. One obvious conclusion is that her true Ieelings are very
diIIerent Irom her words. Nevertheless. it is hard Ior all oI us to see
people who have been active achievers in their younger years let
themselves vegetate in their old age. I believe many people think they
are supposed to be "through." "worn out." retired at a certain age.
We tell them that continually in a thousand subtle ways. From our
earliest years we are used to getting our idea oI ourselves through
reIlections Irom other people. Even though we say it doesn't matter
what others think oI us. our actions belie that assertion.
By making retirement mandatory. establishing quiet secluded
retirement communities. providing basket-weaving classes and other
nursery school activities and labeling it recreation we are telling our
older people what we think oI them.
Today one out oI every Iive Americans is over 55. Other cultures
209
honor their elderly Ior their experience and wisdom. We in the
United States. in our exclusive worship oI youth. are wasting a vital
resource by Iostering the attitude that the old must inevitably be a
drain on our society. The helpless inIants and youngsters we are will-
ing to support because they are our Iuture. but when the old are
lumped in this same "helpless" basket there is oIten resentment.
Perhaps that is because hoping Ior something (a better Iuture) is a
stronger emotion than owing something (a debt Ior what parents.
teachers and our elders have done Ior us in the past.)
Elderly people can more than carry their weight and iI you
already know this you can skip ahead. Ior in this chapter I intend to
show iust that with illustrations oI older achievers.
The Iirst three people I mention because I have a personal con-
nection to them. None would be able to say they know me but I
remotely know them. Two because they live near me and ProIessor
Hildebrand because I have been to his house on several occasions
back when I was in iunior high school and his granddaughter was my
best Iriend.
INSPIRATIONS FROM THE 1980s
JOEL HILDEBRAND
Joel Hildebrand was a proIessor oI chemistry at the University oI
CaliIornia in Berkeley. where he authored a Ireshman chemistry text
that was used by thousands oI students over the years. On the occa-
sion oI his 100th birthday the University held a week long celebra-
tion. I am not mentioning him so much to eulogize him as to point
out his connection with the ordinary man. OI course. one oI the
reasons I chose to mention Joel Hildebrand was his age and the Iact
that he was still active. interested and productive past the time when
that is considered ordinary. The other reason is to illustrate the Iact
that one needn't be a politician or a celebrity in order to aIIect peo-
ple. A proIessor oI chemistry at one oI the most prestigious Univer-
sities in the world is not exactly the ordinary man but he was
210
remembered most by his students Ior his humaneness and that is
something to which we can all aspire.
Since I began this book Joel Hildebrand has died. His is an exam-
ple oI what I meant to convey in Chapter FiIteen when I spoke oI no
one knowing iI he has really led a good liIe until the end comes. The
end oI Joel Hildebrand's liIe came when he was still an active. in-
teresting and greatly admired and appreciated gentleman 101 years
old and it was good!
EDITH TRUESDELL
A little closer to home is the example oI Edith Truesdell. a 94-year-
old artist who lives not Iar Irom me in Carmel Valley. CaliIornia. She
recently (1983) had an art exhibit in Monterey and among the paint-
ings shown were three which had been completed during the past
year.
ANSEL ADAMS
An even closer neighbor is Ansel Adams whose photography is
known worldwide. His creativity has brought pleasure and a new
way oI looking at things to many people. He gives speeches Irequent-
ly and livens up any number oI groups iust with his illustrious
presence; willing. active and rarin' to go!
ESTELLE WINWOOD
Estelle Winwood has been an actress Ior eighty-Iive years. since she
was IiIteen years old. Not long ago she appeared in a guest spot on a
television series ("Quincy"). and was seen in a movie as recently as
1976 (Murder bv Death). When asked on her hundredth birthday iI
she was still active in her proIession she replied she was open to oI-
Iers. I only hope someone has a current role Ior her. Where else will
they Iind an actress with eighty-Iive years experience?!!
211
HELEN HAYES
Another great lady oI the theatre. presently in her eighties. is active
in a myriad oI proiects. Helen Hayes hates the words aging. elderly
or senior citizens. She reIers to "her generation" as "grandpersons."
She points out that the attitude oI people in the theatre is unIor-
tunately not common to the rest oI society. So many great roles are
written Ior older character actors. Grandpersons have a place in the
theatre. in Iact they are needed. There is no thought oI Iorced retire-
ment in show business. Once you start listing entertainment
celebrities who are past eighty there is no stopping. I think the
healthiest thing they all have going Ior them is that they are recogniz-
ed and cherished. So many people care about them that a good selI
image is constantly reinIorced. In contrast. oIten the elderly (grand-
persons) are quite alone without Iamily or Iriends with nobody who
knows oI their past accomplishments and experiences nor is willing
to listen.
JAMES MICHENER
James Michener. who is still approaching his eighties (75) is one oI
my personal heroes. Born without the love and security oI a natural
Iamily. he is one oI those rare people who goes through liIe making
lemonade Irom lemons. He worked hard Ior his achievements but
never ceases to share the accolades with others; especially the
American system which he lauds Ior making his successes possible.
He is even now working on a novel about Texas which is slated Ior
publication sometime during his 78th year and he reportedly has
ideas Ior at least halI a dozen more books. I Ior one look Iorward to
them all.
ARTHUR MURRAY
Time Magazine recently reIerred to Arthur Murray. 87. as one oI the
oldest money managers in the United States. Most oI us. at least
those oI us over thirty-Iive. immediately recognize Arthur Murray as
the Iounder oI a national chain oI dance studios. Times identiIying
212
him with a new career startled me and makes him a perIect illustra-
tion oI what I am trying to convey about older people. They're not
through until they. or society. call it quits. I'm not claiming one oI
the brokerage houses or Iinancial planning Iirms would have hired
an 87-year-old man as a consultant (they'd probably all love to now
that he has proven his worth). Only because he had his own Iunds as
well as those oI trusting Iriends was he able to prove that he could do
a superior iob oI investing.
APPY KROLL
According to a report issued by the Census Bureau in the summer oI
1983. oI the 232.057.000 people in the United States. 2.4 million are
over age 85. Included in this group are 32.000 people over 100 and
one is Appy Kroll. at 106. the oldest grandperson mentioned here.
We would not know much about Mrs. Kroll. as she is less oI a
celebrity than the others I have mentioned. iI it were not Ior her
longevity which has recently brought her into the limelight. She lives
in Spokane. Washington. with her 80-year-old son and is remarkable
because at her age she sounds like the "mom" next door. She stays ac-
tive. cooks and enioys music and is not letting her age dictate how
she should live. I know oI so many cases where well-meaning
children have urged a grandperson to sell their home and go where
they will be taken care oI in case something should happen. The main
motivation being the number oI years the person has lived. not that
they are in poor health or unable to care Ior themselves. Actually it is
insurance Ior the younger person's peace oI mind and oIten hastens
the deterioration oI the parent who listens. Hooray Ior Appy Kroll
and her son Bill Schluter who know how to live I
GRACE MURRAY HOPPER
I read about Grace Murray Hopper in Forbes magazine in the sum-
mer oI 1982. Not only was this lady Ieatured as the oldest oIIicer on
active duty in the Navy. a Captain at age 75. but she was engaged in
a crusade to get businessmen. students and others into the "new
generation" oI computers!! Endowed with remarkable intelligence
213
and curiosity that won't quit. she is the creator oI the computer
language called COBOL (Common Business Oriented Language).
She is prooI that no matter what "they" tell you. creativity thrives in
grandpersons as well as the young!
RUTH ROCKFARB
Ruth RockIarb. a tiny woman weighing only 100 pounds and less
than Iive Ieet tall. was recently Ieatured on a television show. In spite
oI the warnings oI well-meaning "Iriends" who were sure she would
suIIer a heart attack. this lady started running at age 72. Now. almost
ten years later. she has participated in three marathons (26 miles) and
has always Iinished every race she entered. Instead oI letting age dic-
tate her activities. Ruth RockIarb discovered a new interest in liIe
that not only aIIorded new Iriendships but also served as an inspira-
tion to others.
CLARENCE ROSS
Clarence Ross at 83 keeps winning swimming meets. He keeps body
and mind in shape with his keen interest and sharp competitiveness.
Sports are good Ior people oI all ages and it's never too late to Iind
one you're good at and can enioy.
SENATOR SAM ERVIN. JR.
Senator Sam Ervin. Jr. is more than a political Iigure (now a lawyer
again in North Carolina). he has become to some over the years a
Iolk hero approaching Will Roger's Iame. I include him here not Ior
all his witticisms and persuasive stories or his insight into our coun-
try's ills. but Ior a simple statement he once made that should be
taken to heart by everyone who reads this chapter. When asked how
he wanted to be remembered he replied he didn't want to be
remembered too soon. We all know oI people who even while
technically still living. are memories all too soon!
214
INSPIRATIONS FROM HISTORY
Titian painted his masterpiece. the Battle ofLepanto. at the age oI 98.
Verdi wrote his great opera. Othello. at 74 and Falstaff at 80. Sir
Isaac Newton. thought by many to be the most inIluential man who
ever lived. was creative well into his eighties. Sir Christopher Wren
retired Irom public liIe at 86; aIter that he spent Iive years in literary.
astronomical and religious pursuits. Beniamin Franklin was in his
seventies when he was sent to France in 1776 to strike an alliance be-
tween the two countries (France and America). The Iamous French
criminologist upon whose liIe the Count of Monte Cristo is based.
solved his last criminal case when he was 80. Thomas Hobbes
published his translation oI the Iliad when he was 88. Emanuel Kant
wrote his Anthropologv at the age oI 74. Thomas Edison built
chemical plants aIter he was 67. Elihu Root. at 84. reconstructed the
World Court. General Douglas MacArthur was supreme com-
mander oI the occupation in Japan while in his seventies. At age 85.
Bernard Baruch. adviser to six American presidents. was able to say:
"Always the thought oI tomorrow has buoyed me up. I have looked
to the Iuture all my liIe. I still do."
Each day and every day oI your liIe you are storing up ex-
periences. The Iirst 40 or 50 years you are primarily a "taker." the last
50 years should be Ior giving. It is time Ior society to acknowledge
the wealth that has accumulated in our senior citizen pool over the
years in terms oI observations. skills and practical experience.
215
WORKSHEETCHAPTER EIGHTEEN
Be on the lookout for older achievers. They are everywhere.
Look among your own family ancestors as well as those living.
How many movies depict accomplishments of older people?
Gandhi and Winston Churchill are two notables.
Look for news about the older generation in television spots.
Your local newspaper is a good source of what good things
"grandpersons" are doing in your own community.
Make your own list of at least ten people who have made
notable contributions to society after the age of 65.
Try to encourage an older friend or relative to participate in
college courses or physical activity to try something new
each year.
Remember these words attributed to Maurice Chevalier:
"Growing old isn't so bad when you consider the alternative."
216
RECOMMENDED READING
CHAPTER EIGHTEEN
The Graving of America. by James Jorgensen
Over 50. by Arert Uris
The Rights of Older Persons. by Robert N. Brown
The Other Generation Gap. by Cohen & Gans
The Graving of Working America. by Sheppard & Rix
The Retirement Monev Book. by Ferd Nauheim
Your Monev & Your Life. by C. Colburn Hardy
50 Plus Magazine
217
SR PEAR with DECs
Social
Security
Tax
ncome
Tax
Real Estate
& Local Taxes
218
Postpone\
Eliminate
1
Accept
Reduce
SECTION FIVE
TAX
19
i4
S I R"
Social Securitv.
Income and
Real Estate Taxes
THE INCOME TAX
It may be an understatement to say that our tax law is complex; in
Iact. it is almost laughable when you consider the enormous mass oI
instructions. regulations and contradictions which make up the In-
ternal Revenue Code which aIIects the liIe oI every citizen in one way
or another. There are currently 2.350 pages oI Internal Revenue
Code. 5.600 pages oI oIIicial Regulations. 24.500 Revenue Rulings.
37.000 Tax Court and Board oI Tax Appeals decisions. 35.000
Federal Court decisions and currently pending rulings. regulations
and proposed new legislation as well. The main thing to remember is
that the people with the greatest understanding oI our tax laws
generally end up paying the least taxes.
INCOME
Do you know what income is? II you're wise in the ways oI our tax
codes you'll ask: "Do you mean gross income. adiusted gross in-
come. ordinary income. earned income or taxable income?"
221
Congress deIines gross income as "... all income Irom whatever
source derived." That doesn't seem to leave much to the imagination;
salary. dividends and earned interest. proceeds Irom sales. services.
barter proceeds. alimony payments. pension and other retirement
plan payments. winnings (prizes as well as dollars). anything you
Iind. cancelled debt (you may not get money but you get relieI Irom
no longer having to pay it). and so on and so on. Now that you're
properly convinced that everything you can think oI is income. I'll
tell you about the exceptions.
GROSS INCOME
Not included in gross income are liIe insurance proceeds which are
thought to indemniIy a beneIiciary Ior the loss oI a loved one and
perhaps someone who was also a means oI support.
Damages received because oI personal iniury settlements are ex-
cluded Irom gross income Ior the same reason; they are viewed as in-
demnity Ior pain and suIIering; also excluded are medical expense
payments made by your liIe insurance company. An added bonus
here is the amazing Iact that the lost earnings which would have been
taxed iI received as wages are Iree oI all taxation when obtained
because you can't work!
As mentioned brieIly in chapter seventeen. the Iirst $5.000 oI
death beneIits Irom a deceased spouse's employer is excluded Irom
your gross income.
Disability payments Irom insurance you purchased yourselI are
not included in gross income but iI your employer paid Ior the con-
tract and you did not report those employer-paid premiums as in-
come then generally the disability payments will be considered tax-
able income to you.
Workmen's Compensation beneIits are not included in Iiguring
your gross income.
Salaries oI enlisted men in combat zones are not taxed. and oI-
Iicers get the Iirst $500/month excluded.
The values oI giIts are also excluded. The rationale seems to be
that the givers oI giIts are the ones with the money so tax them. An
exception to this rule is the case where the giIt you are given consists
222
oI the income Irom real estate or the right to receive interest or
dividends Irom bonds or stock while the donor continues to hold the
property itselI. Since the rents. interest or dividends are new income
they haven't been taxed already (in this case the donor hasn't paid the
tax) so the IRS comes aIter you. the donee.
Meals and lodging are excludable iI essential to your iob.
The value oI ministers' living quarters are also excluded.
Scholarship and Iellowship grants are also excludable when ap-
plied toward study and research as opposed to teaching. The ra-
tionale here is giIts are untaxed and compensation (wages Irom
teaching) is taxed.
The Iirst $100 ($200 Ior ioint returns) oI dividend income is ex-
cluded Irom gross income each year. AIter all. the corporation has
paid taxes on it once already.
Beginning in 1985 taxpayers can exclude Irom gross income 15
up to $3.000 ($6.000 Ior ioint returns) oI "net interest" earned. "Net
interest" means you can deduct interest paid Ior any reason Irom that
received Irom investments and pay tax on the remainder iI it exceeds
$3.000.
Living expenses paid under a homeowner's policy iI your house
was damaged and you have to live somewhere else Ior a while are
also excluded Irom gross income.
Social security beneIits and mustering-out payments Irom the
armed Iorces are both excluded Irom gross income.
The whole subiect oI Iringe beneIits and barter are in limbo. The
IRS want to include them in gross income but by their nature they are
hard to trace.
Term liIe insurance premiums paid by an employer are not in-
cluded in an employee's gross income unless and to the extent that
the Iace value oI the policy exceeds $50.000.
Unemployment compensation is taxable only iI and when your
total income exceeds $20.000.
Since an annuity is purchased with dollars which have already
been taxed. when you get those dollars back they won't be taxed
again but what they "earned" will be. You'd think the politicians
would let you recoup your capital beIore they begin taxing the in-
terest you are earning; aIter all. you could die without having gotten
223
back the original amount you paid Ior that annuity so it can't really
be clear iust what they are taxing. Since they can't wait Ior the real
earnings to begin. they use actuarial tables to determine what you
will or would have made iI you live the amount oI years you're sup-
posed to. The insurance company will provide the actuarial inIorma-
tion you need Ior your tax return.
You're even taxed on interest Irom Treasury bills and bonds oI
the United States Government. You lend the government money.
they give you a modest interest and then have the nerve to tax you on
it! They Iigure your risk is zero but it still doesn't bring out one's
patriotic Ieelings. does it? On the other hand. interest paid to citizens
who loan money to state and local governments by purchasing
bonds. is excluded Irom gross income.
At this point the IRS can see what you've got (gross income
established) and it tries to control its appetite while you now proceed
to take some deductions.
"DECs" (DEDUCTIONS. EXCLUSIONS
AND CREDITS)
BeIore you get conIused. let me arm you with three deIinitions which
when committed to memory should clariIy many questionable situa-
tions. I call them "DECs": deductions. exclusions and credits.
Deductions reduce income.
Exclusions erase all memory oI the transaction.
Credit reduces the amount oI tax due.
We spoke oI exclusions above in determining gross income. Now
we will consider the role certain deductions play in establishing
adiusted-gross income.
BUSINESS DEDUCTIONS
Adiusted-gross income is really your "net income"; everything you
make minus what you spent to make it. which I reIer to here as
"business deductions."
You may deduct Irom your gross income. with exceptions and ex-
planations oI course. all ordinary and necessary expenses connected
224
with making a living. Commuting expenses to and Irom your iob are
not deductible but any transportation expenses incurred while on the
iob are. including meals. lodging. transportation costs. tips. laundry.
phone rails. etc. II you are an employee these expenses must have been
incurred while "away Irom home" and IRS (Internal Revenue Service)
deIines "away Irom home" as requiring you to sleep or rest beIore com-
pleting your work. II you stay overnight you can then deduct meals.
etc.. but not otherwise. (One might suspect the sleep and rest require-
ment was a pet proiect oI the hotel industry lobby.) "Home" under this
regulation reIers to your principal place oI business not your residence.
You can readily see why it is important Ior a traveling salesman to
establish an IRS-deIined "home" somewhere so he can be away Irom it
in order to qualiIy Ior travel deductions!
There is a great deal oI litigation surrounding transportation and
travel deductions so iI you have such deductions in the normal
course oI your business be sure to read the publication IRS puts out
describing its substantiation requirements in this area as well as those
surrounding entertainment.
Entertainment expenses can only be deducted iI you are a
business owner or are an outside salesman unless you are reimbursed
by your employer and can yourselI substantiate the expenses (the
burden is on you). You must keep an account book and provide
receipts or other documentation Ior most expenditures.
Education expenses related to your trade or business are also de-
ductible but not iI the education qualiIies you Ior a new iob or career.
Moving is nowadays considered to be a cost oI earning money iI
the move was made because oI a new principal place oI work. Once
moved you must stay put pursuing a Iull-time occupation Ior a
minimum oI 39 weeks. Also your business must be at least 35 miles
Iarther Irom your residence than was your old place oI business.
There is no ceiling to the moving expenses you can deduct as long as
they are legitimate. but there is a $1.500 limit Ior searching Ior new
quarters. Otherwise you might look Iorever deducting your living
expenses in some Iancy hotel! Expenses incurred in both buying and
selling a home are also included here up to $3.000 but remember your
searching expenses come out oI this $3.000.
225
Also deductible but not really business-connected are alimony
payments and IRA and other retirement contributions.
PERSONAL LIVING DEDUCTIONS
In order to determine your taxable income the adiusted-gross income
is reduced one step Iurther by personal living deductions reIerred to
as "itemized deductions." These itemized deductions are: the interest
deduction (whatever you have to pay Ior the use oI someone else's
money); the casualty deductions (losses oI property caused by theIt.
Iire. Ilood or other disasters); the charitable contribution deduction;
the "medical expense" deduction; and the state and local tax deduc-
tion. Usually people in the higher tax-brackets choose to itemize;
they oIten have large interest payments. more charitable contribu-
tions and they save more on every dollar than would an itemizer in a
lower bracket. Under our progressive tax system as your income in-
creases you get taxed at a progressively higher rate.
The maiority oI taxpayers choose the "easy way" to reduce their
adiusted-gross income; that is by using the "zero bracket amount"
(standard deduction). The zero bracket amount lets you
automatically. no questions asked. reduce your adiusted-gross in-
come by $2.300 iI you're single. $3.400 Ior a married couple. You
don't really subtract this amount Irom adiusted-gross income
because it is Iigured out Ior you in the tax tables. it is a built-in deduc-
tion. ThereIore. iI you itemize you must immediately subtract $3.400
(on a ioint return; $2.300 on a single) Irom your itemized deductions
to counteract the Iorms.
EXEMPTION
Exemptions are another Iorm oI deduction; a people deduction. You
reduce your income by $1.000 Ior each mouth you have to
Ieedeven your own. A mouth is considered yours to Ieed iI you
provide more than halI to the support oI an individual. thereby mak-
ing that individual your dependent. Dependents include children
under nineteen years; over nineteen iI Iull time students (in school
Iive months out oI the year). or iI they make less than $l.000/year;
226
relatives who can live anywhere as long as halI their support comes
Irom you and they earn less than $l.000/year; non-relatives who
must live in your house to be considered dependents but even so iI
your relationship is against the law they cannot be claimed as
dependents (so Iar no live-in lovers. iust spouses). As a rule the
parent who has custody Ior the greater part oI the year claims the
child oI a divorce as a dependent unless another agreement has been
reached.
SO AGAINVAT IS INCOME TAXEH?
We started with the idea that everyone knows what income is:
evervthing'' Then we erased a good portion oI that income with a
whole list oI exclusions; that gave us our gross income. In order to ar-
rive at our taxable income we had to go through three sets oI deduc-
tions; business (things that help you make your living). personal
(zero bracket or itemized deductions). and people (exemptions).
AIter the Iirst stage oI deductions. when business oriented expenses
were deducted Irom gross-income we arrived at what the IRS calls
adiusted-gross income (net income). But it is only aIter the personal
and people deductions are applied that your taxable income can be
determined by reIerring it to the tax tables.
SOCIAL SECURITY
The Social Security Act was legislated in 1935 when there were IiIty
workers Ior every retiree. The tax was originally a mere one percent
oI an employee's salary matched by one percent Irom the employer.
II these Iunds had been invested. as are the Iunds in all other
regulated retirement plans. our social security system would not be
in the Iinancial straits it is today. In Iact. one study showed iI those
Iunds had been managed and invested properly citizens could be
receiving. with no strain. over triple the beneIits the social security
system is struggling to provide currently (1984).
Unbelievably. Social Security is an unIunded program; FICA
taxes (Federal Insurance Contribution Act) have co-mingled in eIIect
with other Iunds Ior years instead oI multiplying oII by themselves as
227
intended. Retirement beneIits were simply paid out oI current taxes.
which was not too bad even in the 50s when there were sixteen
workers paying-in current taxes Ior every retiree receiving beneIits.
Today there are between two and three workers paying-in to every
retiree withdrawing beneIits and the tax is no longer one percent Ior
employer-employee but over six and a halI percent each with raises
anticipated in the Iuture.
Younger workers are iustiIiably bitter about the larger and larger
bite social security tax is taking out oI their pay checks. They come
into the work place on the low end oI the pay scale and Iind social
security takes more Irom their generally meager wages than does in-
come taxes.
The social security system is acquiring obligations Iaster than it is
accumulating Iunds. That's not surprising when you realize the
retired vote is the largest voting bloc in the United States and politi-
cians have long realized the surest way to stay in oIIice is to increase
beneIits Ior their constituents. Problems naturally arise when one
Congress makes promises that a Iuture Congress must keep. Over
the years. beneIits have spread to dependents and survivors so that
barely halI the beneIiciaries oI social security are retired workers
who actually paid into the system. On top oI that. other taxes will
have to increase to keep up with spiraling beneIits to retired state.
local and Iederal government employees as well as retired military
personnel.
Because social security trust Iunds are only allowed to invest in
Iederal bonds. notes and treasury bills. large amounts oI money are
being drained Irom the private marketplace. Business. Iinding its
aIter-tax earnings are insuIIicient to meet demands Ior expansion. is
Iorced to borrow. UnIortunately most oI the potential savings Irom
United States citizens. which should be available Ior such borrowing.
is removed Irom the system by the requirements oI social security.
From this scenario Iollows increased business obsolescence.
unemployment and cries Ior "protectionism."
Social security is an example oI government's attempting to ac-
complish worthwhile goals Irom a sense oI compassion but over-
reaching itselI to the extent that society ends up in a worse situation
than beIore. A large part oI the problem evolves Irom the ineIIicien-
228
oI such a huge bureaucracy which consumes 40 oI what it takes
m iust to support itselI! It is possible that sometime in the next
twenty-Iive years payroll taxes may equal up to 25 oI a citizens'
wages. High social security taxes encourage both unemployment and
inIlation because the employer tends to react to his increasing burden
by either hiring Iewer employees or passing his inIlated expenses on
to the consumer.
Almost everyone has been concentrating on the possibility that
our social security system might go broke. It is true that a handIul oI
analysts have had the courage to point out what I believe to be the
real problem that our politicians reIuse to Iace; not that social securi-
ty may go broke. but that social security may end up breaking our
nation!
REAL ESTATE
STATE AND LOCAL TAXES
There is no uniIormity in the various state and local laws governing
the collection oI taxes. Assessments vary greatly Irom one locality to
another. Judging solely on the basis oI the amount oI taxes residents
are required to pay. it is obvious that some localities are Iar more ex-
pensive to live in than others. The Iact that CaliIornia is our most
populous state and Alaska the least is prooI (as iI prooI were needed)
that people are not apt to base their decision oI where to live on tax
inIormation.
On the other hand. most people don't bother to obtain such in-
Iormation and iI they had it perhaps their decisions would be in-
Iluenced. Certainly corporations are Iormed oIten on the basis oI
where the taxing policies are the most Iavorable. A large percentage.
almost 75. oI all corporations are based in Delaware Ior that
reason.
CALIFORNIA AS AN EXAMPLE
Proposition 13. the controversial measure passed by CaliIornia
voters in 1978. rolled back assessed valuations to 1975-76 levels and
imposed a one percent ceiling on property taxes and also limited
assessment increases to a maximum oI 2 a year or the annual in-
229
crease in the CaliIornia consumer price index. whichever should be
lower. In 1983 the sharp reduction in inIlation was responsible Ior
the drop in CaliIornia's property taxes to one percent. In addition to
reIorming CaliIornia's real estate tax. Proposition 13 provided that
non-property related taxes could only be imposed by approval oI
two thirds oI the voters. Although the United States Supreme Court
held the proposition was unconstitutional over a challenge Ior am-
biguities. it is these same ambiguities which are currently undermin-
ing Proposition 13's eIIectiveness as a buttress against higher taxa-
tion. The reIerence to "special districts." "special assessments" and
"special taxes" is at the heart oI the problem.
In 1982 a suit was brought by the City oI Los Angeles Transit
Commission (Commission) against George Richmond. its own ex-
ecutive director. Ior the speciIic purpose oI clariIying Proposition
13's meaning regarding non-property taxes. The Commission levied
a halI-cent sales tax to raise revenue which the Board oI Equalization
(Board) reIused to collect on the grounds that it was invalid under
Proposition 13's two-thirds vote requirement. Finally the Board
agreed to collect the tax iI the Commission guaranteed to reIund the
money in case the tax was later iudged invalid. Since neither the
Commission nor the Board were in a position to distribute reIunds to
millions oI people (this halI-cent tax was to generate approximately
$225 million annually) the suit was brought by the Commission
against its own director ostentatiously Ior a small inIringement but
purposeIully to test the validity oI the tax. The CaliIornia Supreme
Court evaded the question oI whether the sales tax was a "special
tax" by deciding instead whether the Commission was a "special
district." The court Iound that the "special districts" alluded to in
Proposition 13 meant districts that have the power to levy property
taxes and thereIore because the Commission did not have such a
power it was not a "special district" and not governed by the restric-
tions imposed by Proposition 13.
The two-third vote issue which the parties to the Los Angeles case
had anticipated the court would tackle was actually decided later in
the year in a San Francisco suit contrived in a similar manner by the
City suing its own controller to get a quick ruling Irom the courts on
the interpretation oI "special taxes" as used in Proposition 13. The
230
supervisors oI San Francisco County extended a one-and-a-halI per-
cent payroll and gross receipts tax which should have expired in June
oI 1980. The controller argued "special" means extra or additional
and that any new tax requires a two-thirds vote. The City. on the
other hand. argued successIully that "special" reIers to special pur-
pose and since the payroll and gross receipt tax went directly into the
City's general Iund it was not "special" and thereIore was not subiect
to the two-thirds requirement oI Proposition 13.
The "special assessment" clariIication was given by the courts in a
suit involving a taxpayer in the City oI San Gabriel. CaliIornia. who
Iought a raise in his property taxes above the Proposition 13 limits.
The increase was necessitated by the City's obligation to its employee
pension Iund which the court ruled was a contractural obligation
which the City must be allowed to IulIill. According to CaliIornia's
Supreme Court Justice Frank Newman. iI Proposition 13 had not
provided Ior the IulIillment oI prior contract obligations. such as the
City's obligation to its employees. the entire proposition would have
been iudged unconstitutional by the United States Supreme Court.
It would appear that the CaliIornia Court's interpretation oI
Proposition 13's ambiguous "special districts." "special taxes." and
"special assessments" only served to open Iurther the Iloodgates oI
higher and more taxes. Various citizen groups within the state con-
tinue to work on proposals to amend the controversial proposition.
In chapter twenty-one various taxing philosophies are discussed
and many diIIering proposals explored. There are those oI you who
are practical and don't care how we (U.S.A.) got where it is today in
terms oI high taxes and higher budget deIicits. and don't believe you
can do anything about it anyway. You may iust preIer to absorb
practical inIormation on minimizing the very real tax bite you per-
sonally must Iace. However. the best way you can work Ior yourselI
is to work Ior reIorm on a national level not iust Ior reIorm on your
own individual return. First. you have to decide what you personally
think is right philosophically even though that may initially entail
going against your own pocketbook. Things that are valuable
always have a price tag!
231
WORKSHEETCHAPTER NINETEEN
1. Review the list of exclusions. Are you excluding all the
following when you report your income?
life insurance proceeds
court-awarded damages
medical payments via insurance
lost earnings via insurance
1st $5,000 employee death benefits
living expenses via insurance while home was
damaged
unemployment compensation (if total income is
under $20,000
gifts
grants for study and research
annuity payments minus interest
1st $100 of dividend income
social security benefits
workmen's compensation
disability payment from personally paid insurance
2. Which of the following deductions are you eligible to
take? Do they exceed the zero bracket limits?
related to employment moving
transportation buy/sell home expenses
meals alimony
lodging RA (similar) contributions
tips interest paid
laundry casualty losses
phone calls charitable contributions
education medical expenses
entertainment state and local taxes
232
3. Exemptionsare you including everyone eligible?
minor children?
elderly parents?
others to whom you contribute half their support?
no pets please!
RECOMMENDED READING
CHAPTER NINETEEN
The Complete List of IRS Tax Deductions. by Rosalie and Howard
Minkow
Creative Tax Benefits. by Rosalie Minkow
You Can Profit from the New Tax Law. by Wiltsee and Sammons
How Anvone Can Stop Paving Income Taxes. by Irwin SchiII
How to Pav Zero Taxes. by JeII Schnepper
1983 U.S. Master Tax Guide. Commerce Clearing House
Travel and Entertainment. Business or Pleasure? Commerce Clear-
ing House
1983 Guidebook to California Taxes. by Russell Bock
State Tax Handbook (all states). Commerce Clearing House
1983 Social Securitv Explained. Commerce Clearing House
Address: Commerce Clearing House. Inc.
4025 W. Peterson Ave.
Chicago. Illinois 60646
Consult the reading list at the end oI Chapter Sixteen Ior inIormation
about social security taxes.
233
JLJXJ
"P E A R"
Postpone. Eliminate.
Accept and Reduce
Tax evasion. dodging your obligations. may be a crime but tax
management is not. Certain socially desirable investments are en-
couraged by the way our tax laws are written with provisions Ior the
creative use oI tax saving opportunities.
There are Iour ways to handle your taxes. They are easy to
remember iI you use the acronym PEAR; Postponement. Elimina-
tion. Acceptance and Reduction. I will. in this chapter. discuss each
separately.
POSTPONEMENT
CAPITAL GAINS AND LOSSES
It is almost always desirable to postpone paying taxes whenever
possible. (1) II inIlation is a Iactor. your dollars will be less valuable
in the Iuture than currently; (2) you may Iind yourselI in a lower tax-
bracket. especially iI you are about to retire; (3) the postponed tax
dollars continue to work Ior you; (4) maybe your Iinances will take a
turn Ior the better and you will be able to pay the taxes at a later date
without resorting to borrowing; and (5) perhaps you will be able to
take advantage oI the capital gains provision in our tax law.
235
One basic tenet in tax management is to accelerate your current
expenses and postpone income as long as possible. The reason Ior
this has to do with the capital gains rules. We have discussed earlier
the advantage oI holding an investment more than a year so that
upon sale the income will receive Iavorable tax treatment. Only 40
oI the income (gain) will be taxed at your individual tax-rate as op-
posed to having a 100 taxed iI the investment were liquidated
beIore twelve months had elapsed. Similarly iI the investment pro-
duced a loss it would be either a short-term loss or long-term loss ac-
cording to the same rules; i.e. whether it had been held over or under
the twelve-month qualiIying period.
Just as short and long term gains are taxed diIIerently (100 tax-
able as opposed to 40 taxable). short and long term losses receive
diIIerent treatment under current tax law. Short term (under twelve
months) losses can be used to reduce ordinary income dollar Ior
dollar whereas long term losses only reduce ordinary income by
50; it takes $2 oI long term capital loss to reduce $1 oI ordinary in-
come. Naturally you would preIer to have short term capital losses iI
you must have losses at all.
REAL ESTATE
Real estate oIIers so many tax advantages it will be used as an exam-
ple throughout this chapter. It is unique in that it can be used to
postpone capital gain taxes indeIinitely.
Any proIit attributed to the sale oI your principal residence need
not be taxed until two years Irom the sale date. II during that period
you purchase another home equal in value or more expensive than
the one you sold. the gain Irom the Iirst sale is postponed until you
sell your new home at a Iuture date. "Tax basis" reIers to the price
you initially paid Ior the home plus remodeling expenses. Routine
maintenance is not included but maior improvements such as room
additions. decks. patios. pool. landscaping. etc.. are considered
capital additions and raise your tax basis. It is possible to postpone
taxation on probable gain in this manner over and over but each time
the cost basis oI the current home must be reduced by the amount oI
the deIerred gain on the Iormer home. That means. oI course. that
your current home will be subiect to a larger gain when sold. For ex-
236
ample: Mr. John Dough. a taxpayer in the highest tax bracket.
bought home "A" Ior $70.000 and sold it Iive years later Ior $90.000.
Figuring the capital gains tax on the $20.000 proIit. he would be Iaced
with a $4.000 tax liability. Remember. according to the capital gains
rules. only 40 oI the $20.000. or $8.000. would be subiect to taxa-
tion and at 50 which is the highest tax-bracket rate currently
$4.000. Mr. Dough. however. doesn't pay that tax. he postpones it
by purchasing home "B" within the two-year time limit. Ior
$100.000. Three years later Mr. Dough sells home "B" Ior $150.000.
His gain is $70.000. not $50.000. because his cost basis (price he paid
Ior the house) is reduced by the amount oI his deIerred gain on the
other house. ($100.000 price paid minus $20.000 gain on house "A.")
II we start with a cost basis oI $80.000 it is easy to see how Mr.
Dough is leIt with a capital gain oI $70.000 ($150.000 minus $80.000
$70.000). He can postpone paying tax on the $70.000 capital gain
by buying another house valued at $150.000 or more ad inIinitum.
On the other hand. it should be noted that should a loss occur on
the sale oI your personal residence you could not deduct that loss
Irom your taxes because it has no connection with a trade or
business.
EQUITY INVESTMENTS
The capital gains concept Iavoring postponement oI income holds
Ior any equity investment with potential Ior appreciation in value.
Precious metals. diamonds. art and other collectibles appreciate in
value and are only taxed on their gain when sold. OI course. they
pay no income until sold and may even be costly to hold because oI
the need Ior insurance. saIe deposit boxes and other saIety measures.
Common stock and discounted bonds are Iavorites in this area.
Growth stocks are purchased with the idea that they will increase in
value making them ideal candidates Ior capital gains treatment.
When a bond is bought at a discount (less than par value) a gain is
built in (diIIerence between the price you paid and selling or maturity
price). so iI held Ior more than twelve months it will also be taxed at
capital gains rates. But a word oI caution; U.S. savings bonds are
always issued at a discount but they are not treated as capital assets.
The diIIerence between the price you paid and the price the govern-
237
ment pays you on redemption (or that you obtain Irom a beIore-
maturity sale) is considered to be "interest" not a capital gain and is
thereIore taxed at ordinary income rates.
With series HH bonds interest is actually paid to the owner
periodically and the owner is taxed as the interest is received. Series
EE bonds allow you to pay taxes on an annual basis or postpone pay-
ing taxes until the bonds mature or are otherwise redeemed. Upon
maturity series EE bonds may be exchanged Ior series HH bonds
without triggering a taxable situation making the postponement oI
taxes even longer.
EXCHANGES
Taxes may be deIerred on simultaneous "like kinds" oI property (In-
ternal Revenue Code Section 1031). There are complex rules in this
area Ior determining "like kind" and "Iair market value." II. in order
to achieve a tax advantage. you are considering an exchange oI prop-
erty as opposed to an outright sale and purchase. make certain you
contact a tax proIessional skilled in exchanges to guide you through
the complexity oI unique deIinitions and exceptions. Used personal
property is an exception because it is unlikely you would have a tax-
able gain because the goods would have most certainly have
depreciated below their original cost. However. real property and
collectibles that have appreciated are given scrutiny by the IRS. New
rulings are being issued continually and in Iavor oI the taxpayer on
occasion. Don't overlook the potential here Ior tax advantages but
approach them armed with proIessional counsel.
RETIREMENT PLANS
In previous chapters we discussed in detail the beneIit oI having in-
vestments increase in a tax-Iree environment. IRAs. Keoghs. liIe-
insurance policies. employee beneIit plans. deIerred compensation
plans. annuities. stock-purchase and proIit-sharing plans are all ex-
amples oI letting capital accumulate in a tax-Iree environment with
taxation postponed until income is actually realized. Taxes are paid
over time iI income is taken in installments. II you elect to receive
beneIits in a lump-sum. ten-year averaging soItens the tax blow and
is an excellent example oI the rewards available to an astute tax-
238
payer. Since 1976 it has been possible to receive your money all at
once rather than in installments. and yet pay taxes as iI it were
distributed to you over a ten-year period. This can result in signiIi-
cant tax savings but there's a "catch" that may make you think twice
beIore electing the ten-year-averaging treatment. This was mention-
ed when discussing lump sum distributions in Chapter 17.
ELIMINATION
Tax avoidance occurs when the rate at which taxes are saved by in-
vesting is greater than the rate at which taxes are paid when getting
out oI an investment!
Taxes can never be totally eliminated; there are iust too many oI
them. II you made less than $3.400/year (at this writing) you might
be exempt Irom Iederal income tax but FICA taxes would come out
oI your wages and sales taxes would continue to be added to your
purchases and so on. There is. however. one way oI eliminating a tax
completely. not iust postponing or reducing it. but you have to know
how and abide by the rules.
REAL ESTATE
Let's go back again to Mr. Dough. Suppose Mr. Dough is now over
age IiIty-Iive and decides to take advantage oI another provision oI
the tax law as it pertains to real estate. There is a once-in-a-liIetime
opportunity to escape taxation on real estate completely iI you have
reached age IiIty-Iive as oI the sale date and have used the property
as your principal residence Ior three out oI the Iive preceeding years.
This once-in-a-liIetime exclusion is available Ior gains up to $125.000
so take it when and where it will do the most good. You get no credit
iI you are unable to use it all; it can't be saved. II Mr. Dough. in our
previous example. had elected to take the once-in-a-liIetime exclu-
sion on the sale oI house A. it would have eliminated the tax on a
capital gain oI $20.000. II. however. he took it on the sale oI home B.
the exclusion would have saved the tax on a $70.000 gain!
II the property is iointly owned and one party qualiIies. both are
deemed eligible. II you divorce aIter being party to such an exclusion
with a Iormer spouse and iI you iointly buy a home with your new
239
spouse. neither oI you will be eligible Ior the exclusion. II even one
party is disqualiIied then automatically both are. Remember. this ex-
clusion is available even iI you choose not to reinvest in another
home at all.
GIFTS
OI course iI you give property away you eliminate the taxes which
might otherwise accrue. There are giIt taxes but since ERTA
(Economic Recovery Tax Act oI 1981) the giIt allowance is quite
generous. As mentioned earlier. you are allowed to give each year. to
separate individuals. $10.000 Iree oI taxation or $20.000 as a couple
iI your spouse ioins in the giIt. The donee (person who receives the
giIt) can be a stranger or a Iamily member. II a Iamily member is a
donee the hope would be that that person is in a lower tax bracket
than the donor and so. although the asset would remain within the
Iamily. the tax liability would have been reduced. This is commonly
reIerred to as "income splitting." Progressive tax rates encourage
citizens to Iind ways oI staying in lower tax brackets. One way oI do-
ing this is to divide income between several taxpayers keeping them
all in low brackets. II $1.000 is earned by someone in the 50
bracket. $500 goes to the Iederal government in taxes. II the income is
made by someone in the 12 bracket. only $120 goes to the Iederal
government.
ERTA. in 1981. made it possible to giIt an unlimited amount Ior
tuition or medical expenses as long as the giIt was paid directly to the
qualiIied institution on behalI oI the donee.
Minors can receive in their own name liIe insurance policies on
their own liIe. U.S. savings bonds and savings accounts. Interest in-
come is taxed directly to the child in his own tax bracket. Provision
has been made Ior minors to receive other property via Section
2503(C) oI the Internal Revenue Code. the UniIied GiIts to Minors
Act or regular trusts. Just which vehicle to use in transIerring proper-
ty should be determined with the advice oI your attorney.
GiIts will be discussed in greater detail when we reach the section
on estate planning.
240
SHORT TERM TRUSTS
Short term reversionary trusts. commonly called CliIIord Trusts.
must continue Ior at least ten years and a day. The idea behind them
is "income splitting." but in this case the donor can get the asset back
when the trust expires. Short term reversionary trusts have been
widely used as vehicles to Iund childrens' education expenses. The
tax saving is large when you consider a $40.000 education at a Iour
year private college might cost a IiIty percent tax bracket beneIactor
$80.000 in before-tax dollars. II. however. the $40.000 were transIer-
red to a CliIIord Trust the actual cost oI educating a youngster would
eIIectively be cut in halI. II appreciating assets are used to Iund the
trust any capital gains that might result are taxed to the trustor
(beneIactor or person who establishes and Iunds the trust). II in-
come. usually in the Iorm oI interest. dividends or rents. is currently
distributed (i.e. during the trust's liIe). the beneIiciary pays the in-
come tax. but iI income is accumulated. then the trust itselI would be
liable Ior the taxes.
UNITRUSTS
Unitrusts. sometimes reIerred to as charitable remainder trusts. are
still another Iorm oI giIting and income splitting. They generally
work like this: A sets up a trustIrom which his child B is to be paid at
least Iive percent oI the trust's assets on an annual basis Ior a speciIied
number oI years. up to twenty or Ior liIe. When the trust terminates
the remaining assets go to charity. A. upon establishing the trust.
takes a deduction Ior contributing to charity. the amount being
determined by the value oI the charity's remainder interest. Addi-
tionally. A is allowed a tax lowering deduction and also escapes any
capital gains taxes which might otherwise have come due on ap-
preciated property. For instance. iI A's tax basis (basis price
originally paid Ior the asset) was $10.000 and the value oI the asset
when transIerred was $50.000 there would have been an $8.000
capital gains tax. assuming A was in the IiIty percent tax bracket and
disregarding interest and other reIinements. ($40.000 proIit taxed at
capital gains rates on only 40 equals $16.000 to be taxed in your tax
bracket which. iI it should be the 50 bracket. equals a tax due oI Jz
or $8.000.)
241
The charitable lead trust is almost the opposite oI what we have
been discussing because the current income is given to charity and
the property itselI is kept. In this manner a large amount oI income
taxes may be eliminated even though a deduction generally is denied.
Various trusts and their use as vehicles to reduce a person's tax-
able estate will be explored more Iully in the estate planning portion
oI this book.
CROWN LOAN
A Crown Loan is an interest-Iree demand note. the interest portion
the IRS unsuccessIully attempted to tax as a giIt. Mr. Crown
transIerred almost $2.000.000 to his children payable on demand and
the IRS argued not only the demand Ior return oI the money might
never be made (sham) but the interest Ioregone on the debt con-
stituted a giIt.The tax court ruled on these issues in Mr. Crown's
Iavor making this an alternative to discuss with your attorney.
(There are pitIalls that cannot be discussed in a book oI this length.)
MUNICIPAL TAX-FREE BONDS
The interest on state and local government bonds is determined by
multiplying the coupon rate by the par value. Taxes are not levied on
this income to the bond-holder which makes Municipals especially
attractive to taxpayers whose income tax-brackets allows them to
achieve a larger aIter-tax net return Irom tax-Iree interest than Irom
higher but Iully taxable interest. You can see that a tax-Iree
municipal bond returning 10 might be a better buy than a cor-
porate bond yielding 14. A 50 tax-bracket buyer would get 7
on such a corporate bond but a 28 bracket buyer. on the other
hand. would obtain a slightly higher yield oI 10.08 on the cor-
porate bond.
Elimination oI taxes should never be the main reason you enter
an investment; yield. growth potential. saIety and your other assets
must all be taken into consideration (use Sydl P. TaccIl).
DIVIDENDS AND ALL SAVERS CERTIFICATES
The Iirst $100 ($200 Ior ioint returns) per year oI dividend income
Irom common stock is excluded Irom your income Ior tax purposes.
242
ERTA also made possible a once-in-a-liIetime income tax exclu-
sion oI interest on speciIic qualiIied savings certiIicates issued Ior a
limited time (between September 31. 1981 and December 31. 1982)
by qualiIied institutions.
ACCEPTANCE
"There's this to be said about taxesiI the taxpayer is alive. he's
kicking!"
II you're one oI the rare people who is willing to accept taxes.
chances are you pay little or none at the moment.
Several years ago James Stanbery. in speaking oI the unIairness
oI our present tax system. compared the hardship oI imposing even
the lowest percentage oI taxes on low income earners with the total
lack oI inconvenience that results when high income earners pay
their taxes. When he spoke Ior the Populist movement in CaliIornia
the highest Iederal income tax rate was 70. He seemed to bemoan
the Iact that 70 tax on a million dollar income would leave the tax-
payer a heIty and. he seemed to imply. uniustiIiable $300.000 to live
on. I wonder how long he thinks our high-bracket taxpayer would be
willing to work and risk Ior the privilege oI providing 70 (currently
50) oI the results oI his eIIorts to the Iederal government?
An old Arabian proverb advises: "Do not cut the tree that pro-
vides shade."
II you are among the maiority oI "kickers" who choose not to ac-
cept taxation meekly and with good humor there is something you
can do besides postponing. eliminating and reducing your taxes as
advised here; that is educate others. President Cleveland is credited
with the Iirm belieI that people should support their government but
the government should not support the people.
II you choose to accept taxes as they stand you are opting Ior the
illusory governmental saIety net which is supposed to protect
citizens Irom the consequences oI their own iudgments. decisions
and actions.
I want to share with you the thought Thomas JeIIerson had on
the subiect oI accepting taxes:
"The suppression oI unnecessary oIIices. oI useless establish-
243
ments and expenses. enabled us to discontinue our internal taxes.
These. covering our land with oIIicers. and opening our doors to
their intrusions. had already begun that process oI domiciliary
vexation which. once entered. is scarcely to be restrained Irom
reaching. successively. every article oI property and produce."
Forbes
REDUCTION
There are more ways to reduce your taxable income than I can hope
to mention here. but depreciation is one oI the most recognized and
widely used methods.
Most things lose their value as they are used over a period oI
time. Deductions Ior depreciation are allowed on this theory even
though in actuality the value oI real property and even some
automobiles seems to increase rather than decrease over time. The
depreciation rules are varied and tend to be complex. ERTA provid-
ed Ior Iaster write-oIIs reIerred to as ACRs (Accelerated Cost
Recovery) than were available beIore 1981. These predetermined
recovery periods are shorter than useIul lives and extend to industrial
plants. machinery. trucks. automobiles. equipment and other per-
sonal as well as real property.
A taxpayer has the option to use straight-line. extended or ac-
celerated recovery periods. There are pros and cons connected with
each one depending on an individual's unique and overall Iinancial
picture. This is an area where an accountant or tax attorney should
be consulted with the obiective oI analyzing the type oI depreciation
you should elect in a given situation.
REAL ESTATE
Real Estate could not really compete as an investment were it not Ior
all the deductions that investors are allowed. Less well known are the
deductions available. at least on a temporary basis. to a homeowner.
Suppose your iob takes you to another locality Ior a Iew years or
you are retired and travel extensively. it is possible to rent your
residence until you return to it and receive special tax beneIits at the
same time. Mortgage interest and property taxes are always deducti-
244
ble on a personal residence but additional deductions are available to
income property such as utility and insurance payments.
maintenance expenses and depreciation. OIten these deductions
outweigh any rent you may receive. Also a tax loss may be desirable
to oIIset personal income taxes. Remember. though. when it comes
to selling a personal residence in the Iuture your tax basis in the home
must be reduced by any depreciation expenses claimed while enioy-
ing rental proceeds Irom the property.
THE "AT RISK" RULE AND "PHANTOM INCOME"
The "at risk" rule was initiated in the tax reIorm oI 1976. Basically. it
states you cannot write-oII more than the amount you have actually
put into an investment unless you are "at risk." meaning personally
liable Ior the "extra." Real estate is an exception. and that is one more
reason it is such a popular investment. but even so one must beware
oI "phantom income."
The windIall oI being able to take more deductions than the
amount you actually have invested in a proiect is an illusory beneIit
reIerred to as "phantom income." Deductions reduce your basis in an
investment so iI it should be a losing proposition you are taxed to the
extent that the sales price exceeds your basis. The "extra" deductions
above your actual investment will be taxed as ordinary income.
DEDUCTIBLE CONTRIBUTIONS TO RETIREMENT PLANS
We have previously discussed IRAs. KEOGHs and other pension
plans in some detail and realize that thanks to ERTA. contributions
by an employee to his own plan are deductible and. oI course. the in-
terest. dividends or other proIits that accrue within the plans are tax-
deIerred.
You must start withdrawal oI retirement beneIits by age 70Jz.
Any money leIt in the plan aIter age 70 Jz must be withdrawn at least
as Iast as a schedule that would reduce the balance to zero over your
expected liIespan as determined by actuarial tables.
Altogether. with a KEOGH oI $15.000 and a maximum IRA con-
tribution Ior a couple with a non-working spouse oI $2.250 it is possi-
ble in 1983 to deduct $17.250 annually and even more aIter 1984. II
you are qualiIied Ior the KEOGH by only part-time selI-employment
245
you might be able to deduct even more iI you also contribute as an
employee under a company plan. It is not a good idea to Iund your
IRA with tax-advantaged investments such as municipal bonds
unless you expect to be in a high tax bracket even aIter retirement!
GOOD AND BAD TAX SHELTERS
The IRS Code provides Ior legitimate shelters as an incentive to in-
vestment.
Abusive tax shelters oIten have inIlated appraisals. unrealistic
allocations and involve improper. extreme and even illegal inter-
pretations oI the law. OIten incomplete or misleading Iacts are
presented in order to obtain substantial tax beneIits. These are in
reality Irauds. They are Irequently characterized by Iorged trading
records. phony transactions. Ialse aIIidavits. illusory notes and
postdated documents.
Roscoe Egger. commissioner oI Internal Revenue. Iavors the
"out-oI-pocket" approach which allows a deduction to the extent oI
the cash investment in the initial year oI an investment. Under this
approach taxpayers will receive a dollar deduction Ior each actual
dollar invested and no more!
HOME OFFICE DEDUCTIONS
Since 1981 the rules qualiIying deductions Ior home oIIices have
become more lenient. The test Ior such a deduction is that the
"oIIice" be used exclusively and continuously Ior purposes oI trade
or business and unless you are selI-employed the home oIIice must be
Ior your employer's convenience rather than your own.
II you qualiIy you can deduct part oI the expenses you incur in
running a home; mortgage and insurance payments or rent. utilities.
taxes and maintenance in proportion to the ratio your "oIIice" bears
to the entire dwelling. Even certain pieces oI Iurniture and business
equipment may be depreciated and written oII over time in a
prescribed manner.
A recent court ruling even allowed deductions Ior part oI a room
because the exclusive business use could be shown even though there
was no tangible separation Irom the rest oI the house. However. a
partition or some sort oI divider as well as removal oI any and all
246
personal non-business-related Iurniture would be advisable iI you
think you might Iind such a deduction worthwhile and iustiIiable.
CREDITS
Credits are the best thing that can happen to your tax bill! See page
224. Remember they don't iust reduce your taxable income they
reduce your tax bill directly. Various credits can be taken Ior
rehabilitating real property under qualiIying conditions as to age and
use. Ior child-care. Ior installing insulation. weatherstripping. solar
collectors. wind-driven generators Ior certain hiring practices.
political contributions and in some instances simply Ior being a
senior citizen. or as Helen Hayes would say. a "grand person"!!
NOT SUCH GOOD NEWS
Not all oI the recent tax reIorms have been met with cheers. You can
only deduct medical expenses that exceed 5 oI your adiusted gross
income. Also since 1983 you can no longer deduct halI oI your
medical insurance premiums but now these premiums will be treated
as iust another medical expense.
As I write this there is an eIIort aIoot to limit deductions Ior in-
terest payments. except those on residential mortgages. Also to limit
the tax deductions on employer contributions to employee health
plans.
The Alternative Minimum Tax was enacted to make certain
members oI the most aIIluent segment oI our society do not manage
to escape without paying any taxes at all. A 1971 news headline in-
Iormed us that 276 people with incomes over $100.000 each paid no
taxes whatsoever in that year. The Alternative Minimum Tax is com-
puted by adding any tax preIerence items (such as accelerated
depreciation. the excluded 60 portion oI capital gains. excluded in-
terest. costs and certain expenses connected with mining. oil drilling.
etc.. etc.. which do not concern the average middle income taxpayer)
to adiusted gross income and then subtracting certain itemized
deductions and speciIied exemptions which will yield the Alternative
247
Minimum Tax base. This is taxed at 20 and must be paid iI it is
higher than an individual's tax computed in the regular manner.
Today there are approximately 300.000 shelter returns under ex-
amination by the IRS and 16.000 pending beIore the tax court. This
constitutes 30 oI the total docket (load). Many errors the IRS
catches are its own. One study showed 63 were made by IRS data
processing personnel as opposed to 37 by taxpayers. Thanks to the
new tax law TEFRA (Tax Equity and Fiscal Responsibility Act) the
IRS needs to revise IiIty-one Iorms and thirty-eight publications.
SUMMARY
In general. iI your goal is to eliminate taxes the only way it can be
achieved is by losing or giving your money away. with the one ex-
ception discussed involving your personal residence once you have
reached age 55. II you make money on your investments taxes must
be paid eventually; the trick is in the timing! Remember this section is
called Tax Management not Tax Evasion.
Anytime you can postpone income tax liability it is to your ad-
vantage to do so. You can take the money currently and invest it so
that it will have multiplied by the time the tax has to be paid. Just as
you might employ a hired hand on a ranch even though he is suppos-
ed to report somewhere else in a Iew months. you could continue to
have that money work Ior you even though you know it is eventual-
ly earmarked Ior taxes and the IRS. Uncle Sam may get it sooner or
later but you can keep the Iruits oI its labor!
Anytime you are able to shiIt earned income to another taxpay-
ing entity which is in a lower marginal income tax bracket. overall
tax savings will be achieved. Sometimes the shiIt is accomplished by
setting up trusts. One oI the beneIits oI incorporation is the Iact that
a corporation is a distinct entity which is taxed at a lower rate than is
an individual earning the same income. Also shiIting the income
itselI which would normally be taxed at ordinary tax rates to some
Iorm oI tax advantaged income such as real estate with its deprecia-
tion. deductions and capital gains treatment will all help to make you
a winner!
248
WORKSHEETCHAPTER TWENTY
Always ask concerning a potential investment:
1. s it a "good" investment on its own merits?
2. What is the tax impact to your overall financial situation?
3. s this a "preference" item?
4. Have you checked to see how you stand with the minimum
tax regulations?
5. s it liquid?
6. When liquidated how will it be taxed?
7. Considering your current and anticipated tax bracket, how
advantageous is tax exempt income vs. taxable income?
8. Can you sell any "losers" in your portfolio to offset current
gains?
9. Are you taking advantage of the lower long-term capital
gains taxes wherever possible?
10. Have you considered giving appreciated long-term
capital gain assets to charity?
11. Are you taking depreciation where allowed? Credits?
12. Have you considered ways to delay taking current in-
come?
13. Have you been using exchanges to defer taxes?
249
14. Have you taken the provision for "stepped up basis" into
account in your planning?
15. When selling stock acquired over a long period of time do
you consider which certificates are best to sell for tax advan-
tages?
16. Are you currently or have you considered the advantages
to be gained from using trusts in your planning?
17. Are you taking advantage of RAs, KEOGHs and other
estate building plans?
18. Are you earning the highest possible after-tax total
return on your present investments?
19. Have you considered the merits of 10-year-averaging
available for lump-sum death distributions?
20. Does a lifetime giving program make sense to you con-
sidering the $10,000/year you can give free of gift taxes to an
individual?
250
Compare the before
and after tax yields
of the following:
(those you own or would consider investing in)
bank savings certificates
or certificates of deposit
money market funds
corporate bonds
"deep-discount" bonds
corporate bond funds
convertible bonds
municipal bonds
municipal bond funds
writing options
common stock
preferred stocks
convertible preferreds
mutual funds
buying new issues
U.S. Govt. Securities
treasury bills
treasury notes
treasury bonds
Ginnie Mae pass-throughs
investment real estate
variable annuities
buying puts and calls
trading in commodity futures
oil/gas leases
equipment leases
selling stock short
precious metals
diamonds & other gems
collectibles
251
RECOMMENDED READING
CHAPTER TWENTY
Everything written by B. Ray Anderson
Business Use of Your Home. IRS Publication 587
Beat the IRS Legallv. by Andrew Ciaramitaro
The New Tax Law and You. by Jerome Tuccille
How You Can Get the Most from the New Tax Law. by Smith and
Spragens
Perfectlv Legal. by Steiner and Kennedy
Evervthing You Alwavs Wanted to Know About Taxes. by Michael
Savage
Real Estate Taxation. by Jeddeloh and Perkins
Real Estate Tax Shelters. by John CM. Wilkinson
252
21
"Sounding Off"
Taxes are as old as recorded history. They are mentioned in ancient
Sumer around 3.000 B.C. Tithing. the practice oI pledging 10 oI
one's wealth. was commonly practiced among ancient peoples and
still is used today by some religious groups in the United States.
Rome collapsed when taxation reached 52 and when taxes im-
posed on the colonies reached 23 . that was considered excessive
enough to start a revolution with Britain.
It is interesting that prior to 1862. the Iederal government was
supported by revenue Irom import duties and proceeds Irom the sale
oI public lands. It was only in 1862 that the Bureau oI Internal
Revenue. income and other internal revenue taxes were all establish-
ed in order to Iinance the Union in its war against the South. AIter
the Civil War IRS activities declined dramatically only to emerge
again in Iull Iorce aIter the passage oI the Sixteenth Amendment in
1913. The Sixteenth Amendment. authorizing our present income
tax. eIIectively cancelled Article I Section 9 Paragraph 4 oI our
original constitution. The draIters oI that original Article knew Iull
well what they were doing when they expressly Iorbade taxation on
an individual's income. "The power to tax is the power to destroy." is
a quotation that rings true!
253
PROGRESSIVE OR GRADUATED TAX
The progressive tax embodies the idea that people with higher in-
comes should bear relatively more oI the country's tax burden. In
Iact. I recall reading. but I'm not sure where. that it is a ".. . long-
standing principle..." that a person should be taxed on his ability to
pay. Apparently the writer believed this statement Iell into the
category oI Iacts beyond dispute such as "babies should be loved"
and "redwoods saved." Upon reading the statement I remember
thinking it had been around about as long as Marx and Lenin.
Perhaps a less disputable Iact in America might be the concept oI
private property and Ireedom. Being required to give halI oI the
Iruits oI your labor to government so that it in turn might distribute it
to others less productive. energetic. willing to take risks. lucky. Ior-
tunate or less anything. is an eIIective means oI "communizing" a
society.
Politicians are Irequently quoted as bemoaning the Iact that any
reduction in taxes will "cost the government." "the government will
lose." The implication is. oI course. that the government owns or at
least has a right to everything a citizen has. The concept that you are
government property allows the government to tax as it does. The
IRS graciously allows certain deductions as we have seen. but only iI
you can prove they are iustiIied. The principle being not that the
money is yours and may we have some please. but rather that your
earnings belong to the government and the burden is on you to prove
you are entitled to keep any!
A LITTLE HISTORY
Where and when did this thinking originate?
In 1928 government at all levels spent less than 10 oI the gross
national product. Two-thirds was spent at the state and local level
which meant that less than 3 oI the national income was spent by
the Iederal government in 1928. Almost IiIty years later. in 1977.
total government spending had risen to 40 oI the gross national
product and two-thirds was Iederal spending! Out oI every dollar a
citizen spent in 1977 the Iederal government controlled 40* oI it.
254
Milton Friedman. the notable prize winning economist. has
pointed to the 19th century as being one oI the most productive
periods in history. not iust Ior the robber barons. but productive Ior
the common man. Illiterate immigrants were received into this coun-
try in droves and progressed at a rate that would make a person's
head spin today. They were able to improve their condition and that
oI the nation because they were limited only by their own imagina-
tion and endurance; the United States was indeed a Iree society. OI
course. there was poverty and misery but it was more easily endured
because it went hand in hand with hope and opportunity. Even iI an
immigrant working on the railroad or in the sweatshops realized he
might not obtain the riches oI a robber baron. he Ielt one day his
children might. The dream was Iresh. sweet and motivating. During
this time in her history. America came closer than ever beIore or aIter
to embracing the Iree enterprise system.
Forbes Magazine. in its "Thoughts on the Business oI LiIe."
quoted Herbert Hoover:
"It has been dinned into us that this is the Century oI the
Common Man. The idea seems to be that the Common Man has
come into his own at last. But I have never been able to Iind out
who this is. In Iact. most Americans will get mad and Iight iI you
try calling them common. . . I have never met a Iather and
mother who did not want their children to grow up to be uncom-
mon men and women. May it always be so. For the Iuture oI
America rests not in mediocrity. but in the constant renewal oI
leadership in every phase oI our national liIe."
FREE ENTERPRISE VS. SOCIALISM
Free enterprise implies Ireedom to establish an enterprise. It is the an-
tithesis to the myriad oI Iees and regulations and certiIications a per-
son has to go through today to engage in business.
Some people support socialism. Iiguring that iI widgets are going
to be manuIactured or gidgets produced why shouldn't the govern-
ment reap the beneIits (proIits) rather than a private entrepreneur?
The answer: The entrepreneur has to satisfv his customers and the
government doesn't. a Iact which Soviet citizens can veriIy. Quality
255
is one oI the main diIIerences between Iorced and voluntary ex-
change; the other is eIIiciency. In 1982 it was reported that Iederal
workers had salaries 35 Ji higher than workers in the private sec-
tor. It is estimated that anywhere Irom 150.000 to 400.000 Iederal
iobs could be taken over by private enterprise. However. the vote oI
Iederal employees is important to every politician and certainly none
wants to be blamed Ior taking away Iederal employee iobs!
On the other hand. there have been abuses in our system. in our
Government's honest attempt to provide Ior the "...general
welIare. .." (Article I Sec. 8 U.S. Constitution) which have resulted
in the ridiculous situation where not working. while not being as
lucrative as having a Iederal iob. has been more proIitable than
working in the private sector.
It is certainly no incentive to work when it's possible to get the
same income Irom transIer payments that a worker who pays taxes
must earn. There have been cases where a wage earner has been
penalized because oI working. paying taxes on his earnings rather
than sitting back and receiving the identical amount through govern-
ment auspices tax Iree!!
II transIer payments such as unemployment compensation. pen-
sions and disability payments Ior instance. were taxed. the truly
poor wouldn't be touched because they would remain below the cut
oII point which requires taxation anyway. As we saw in chapter
nineteen. unemployment compensation is taxed iI your total income
exceeds $20.000 so this is not a new or radical suggestion. Many oI
the people getting "transIers" already have adequate assets and
although they naturally would resent paying taxes on this additional
income. Ior which they qualiIy. there is no rationale Ior them to
avoid paying taxes. or in some cases even accepting it (social securi-
ty. Ior instance).
For example. a retired lady recently consulted an investment ad-
viser in our area because she had $200.000 in a money market Iund
coming due and didn't want to put it any place that would give her
interest because that would raise her income and make her responsi-
ble Ior more taxes. She didn't need more income because she was
already living comIortably on her husband's pension and social
securitv'
256
About halI oI all government transIers come in the Iorm oI social
security pension payments. Because the capital has not been proper-
ly invested. as in a qualiIied pension plan. to reIer to social security
as a pension at all is a Iarce. but one which the government
perpetuates. It would at least show some consistency to exempt the
contributions and tax the beneIits as in a private pension plan.
The progressive tax punishes human eIIort! High bracket tax
payers do strange and oIten non-productive things (like digging dry
holes) in an eIIort to reduce their tax bite. Although attorneys and
accountants and Iast talking promoters may beneIit. the government
ends up collecting Iewer dollars and society suIIers because oI the
misallocation oI capital. Our gross national product is less. thanks to
tax distortions. Many Americans Ieel pressured to make their invest-
ment decisions on the basis oI complex tax calculations rather than
on the economic merits oI the particular situation. We are Iaced with
the ludicrous situation where our tax law dictates how our economy
operates!
CORPORATIONS
Legislated and pointed tax reductions unintentionally shiIt capital
within the corporate sector by providing tax breaks Ior investments
that would otherwise be insuIIiciently proIitable to attract investors.
This is a way oI subsidizing ineIIiciency. Even worse is the Iact that
unwarranted expansion and conglomeration are the natural results
oI corporate retention oI earnings. With so much capital staying
within the organization instead oI being returned to the investors as
taxable dividends. corporations start to behave like investment
trusts; themselves buying investments and planning mergers. Addi-
tionally. the government Iails to receive revenue Irom the dividends
that aren't issued and instead has to be content with receiving halI the
tax revenue at a later date in the Iorm oI an individual's capital gains.
Since interest payments are deductible. corporations are encouraged
to borrow to obtain capital as opposed to selling stock on which non-
deductible dividends must be paid. Since it is easier under our present
tax system. to shelter investment income Irom high tax rates than it is
257
to shelter salary income. we get the phenomena oI people with the
highest income actually paying less taxes than many middle class
salaried workers. It is really the people who consider themselves
egalitarians who should be behind the idea oI repealing the corporate
tax because it has been shown that the wealthy pay less tax under ex-
isting law than they would iI corporate taxes were integrated into the
personal tax.
CORPORATE TAXES
On January 26.1983. Ronald Reagan was quoted in Boston as saying
he wished to abolish the corporate income tax. The media im-
mediately made him a laughing stock. AIter all. over $58 billion
dollars is annually pumped into the treasury making up 9 oI all
Iederal tax receipts. The president pointed out the not-so-earthshak-
ing Iact that corporations are owned by people who would continue
to pay the tax as individual investors at rates that might well be less
than the maximum corporate tax rate and would thereIore achieve
savings.
Tax-exempt institutions pay corporate taxes indirectly through
their investments in proIit making businesses and would also beneIit
iI taxes were not Iirst paid by the corporation as a distinct entity. I
have the Iollowing quotation in large letters on my oIIice wall: "...
When are we all going to have the courage to point out that in our tax
structure the corporate tax is verv hard to iustifv . . . ?"
Where is the iustice in Iirst levying a 46 tax on corporate proIits
and then on top oI that. taxing individual dividends? This is a blatant
example oI double taxation and Americans are iust taking it on the
chin. Most politicians try and make you Iorget that corporations are
made up oI millions oI small shareholders. There's a good chance
you are one oI them. iI not directly then indirectly through your
mutual or insurance Iund. labor union pension Iunds or other retire-
ment accounts or relationship with a large tax-Iree institution (educa-
tional. medical or religious) whose endowment may look like it is in-
vested tax-Iree but who in reality is paying the 46 corporate tax
beIore they ever get hold oI their supposedly tax-Iree dividends.
258
President Reagan didn't expect the government to give up
revenue by abolishing the corporate tax. he thought instead there
would be a net gain all the way around.
A.F. Ehrbar. in an article he wrote Ior Fortune Magazine some
years ago. pointed out the merits oI abolishing corporate taxes. II
corporations were taxed like partnerships. each shareholder bearing
his share oI the tax burden on a pro-rated share oI the earnings. the
corporation as a separate entity would be Iree Irom taxation and
society as a whole would beneIit. Part oI the present corporate tax
burden is passed on to consumers and acts like an "erratic sales tax
that Ialls unevenly on diIIerent goods and distorts the output mix."
Shareholders respond to their share oI the present double taxation by
investing in non-corporate areas with lower value to society but bet-
ter aIter-tax consequences to individuals. This is a prime example oI
the distortions our present tax system causes.
Former Secretary William Simon championed the merits oI
abolishing the corporate tax way back in 1975 and even Jimmy
Carter iumped on the bandwagon Ior a while. Ehrbar suggests that
really corporate proIits should be ignored because reported earnings
aren't actually income and tax should Iall only on the dividends and
capital gains oI individual shareholders. He adds. however. that such
an idea is a political impossibility because "the loophole baiters
would never be able to resist screaming about all those reported proI-
its that were not being taxed at all."
The Iollowing is a quotation Irom the Wall Street Journals report
oI President Reagan's inIamous "Boston Remarks" the end oI
January 1983 as reported by Rich Jaroslavsky:
"White House oIIicials. reacting to the potential Ior political
damage. scrambled to play down the signiIicance oI the Presi-
dent's comments."
When I was in grammar school Harry Truman was President and
I remember no one particularly liking him. everyone criticizing and
yet admiring him at the same time. I remember hearing over and
over. "Well. by G-d. he has guts!" Because he stood behind his
belieIs. the country seemed to stand behind him. I don't know iI he
could or would have been allowed to take stands today with public
relations men and pollsters weighing the eIIect oI every word and
259
trying to "clean it up" Ior public consumption so that no one is oI-
Iended. Putting a politician in the best light is not necessarily putting
him in a true light.
CAPITAL GAINS
Ronald Reagan would like to lower capital gains tax rates because he
said history shows with each reduction in the rate the government
has actually increased its revenues because capital gains investment
and sales become so much more attractive.
The proposal to halve the long-term capital gains period to six
months Irom its present one year holding period was attempted in
both 1981 and 1982. The rationale behind the move is that capital is
presently locked into assets longer than would be iustiIied on a pure
investment basis. There have been many changes in the capital gains
holding period over the years. From 1922 to 1933 the holding period
was two years. In the three year period Irom 1934 to 1937 it was
changed Iour times ranging Irom one to ten years! From 1938 to 1941
there were two periods: eighteen months and two years. The six
month holding period was the norm Ior thirty-six years between
1942 and 1976 when the Tax ReIorm Act lengthened the holding
period in stages beginning in 1977 to nine months to one year in 1978
where it has remained in spite oI eIIorts to shorten it again. In 1978
there was a signiIicant cut in the capital gains tax Irom 49 to 28
and in 1981 down to the present 20. When the capital gains tax was
reduced. tax revenues on capital gains increased as supporters oI the
reduction had promised.
INDEXING
COST OF LIVING ADJUSTMENTS
Over two centuries ago indexing was reIerred to as tabular standard.
The idea dates back at least to 1707 when it was developed in
response to ethical and moral needs. II the purchasing power oI a
person due to receive money in the Iuture were eroded because oI
higher prices over time (inIlation) the unwary would be cheated.
In our recent past U.S. Savings Bonds have betrayed a trusting
260
public. The purchasing power at maturity was less than when the
bond was bought at a discount years earlier. That's because the cost
oI living doubled between 1972 and 1980.
Indexing became law in 1981 and is to go into eIIect in October
1985. Indexing adiusts tax brackets to oIIset inIlation. Without in-
dexing. even though purchasing power remains the same. higher
nominal incomes move citizens into higher tax brackets. II indexing
takes place the government will be denied a revenue windIall. Taxes
have not had to be raised (always unpopular with the voters) by the
legislators because inIlation automatically raised them by carrying
the taxpayer into higher and higher brackets. The taxpayers' tax
burdens increased at a Iaster clip than did their income.
The Iunny thing about indexing is that it helps the low and mid-
dle income taxpayer and does nothing Ior those already in the highest
brackets who no longer have to be concerned about "bracket creep."
Without indexing the average guy will suIIer. not the wealthy!!
Without indexing the government is able to raise the taxes oI the
lower income taxpayers without legislation oI any sort but those in
the highest tax brackets can be raised no higher and are thereIore ex-
empt. How then can those groups that continually cry out Ior com-
passion Ior the poor be against indexing? It makes no sense! The
Constitution gave Congress the power to tax but that power has been
delegated to inIlation and must be taken back by indexing.
C. Northcote Parkinson in his book. The Law and the Profits.
Iormulated a law which states: "Expenditure rises to meet the in-
come." In a speech beIore the Commonwealth Club in San Fran-
cisco. CaliIornia. in the spring oI 1983. Milton Friedman expanded
the law as it applies to the Iederal government to read: "Expenditure
rises to exceed the income."
Rather than cut expenditures. certain legislators are demanding
265 billion in. new revenues through 1988. One party has come up
with a proposal to raise revenue by repealing the third stage oI the
Reagan tax cut and repealing indexing which by itselI will raise $90
billion dollars even assuming less than a 5 inIlation rate. The third
year tax cut amounts to 40 oI the entire tax relieI package on an in-
come oI $25.000 but only 5 on an income oI $200.000. Again. who
will be hurt the most by such actions?
261
The argument Ior killing indexing is quite simple: the government
needs the money.
It is a dangerous assumption and one natural to a socialist
government not a democratic republic such as ours. that as taxes
continue to increase ever higher and higher. citizens will continue
happily working as hard and productively as ever turning over a
larger and larger share oI their income to government. The idea that
an economic slowdown could result Irom an increasing tax burden is
one the politicians who are against indexing reIuse to entertain.
The Iacts: When taxes dropped Irom a high oI 70 to 50 Ior
top income brackets. the revenue increased Irom 77 billion to 85
billion dollars. This only proves the point that the lower the price the
more you sell oI anythingeven taxes I! Indexing would not be need-
ed iI there were no inIlation; indexing removes most incentive Ior
government to inIlate but. oI course. it erodes debt. Government
and other borrowers can pay oII debt with cheaper dollars. InIlation
dilutes the currency. With indexing in place Congress can no longer
rely on inIlation to do its duty work.
TAX REFORM
In the middle oI January 1983. President Reagan made it clear he
wanted to overhaul the nation's complicated tax system in order to
make it easier Ior people to understand. This has been a goal oI every
president in memory. It seems to many that only the wealthy can aI-
Iord the lawyers and accountants needed to Iigure out the current
complex tax code and this in itselI is a strong bias against the middle
and lower income taxpayer. The average citizen is no longer able to
eIIectively handle his own aIIairs but the high bracket taxpayer has
an edge. He can enlist proIessional advice to help him beat the
system.
FAIR AND SIMPLE
The goal oI tax reIorm is to achieve Iairness and simplicity. The Iirst
hurdle to scale is the philosophical diIIerences between those that
believe this can be achieved by a Ilat-rate tax or the progressive
system oI taxation we have now.
262
FLAT-RATE
There are many variations oI Ilat-rate tax plans but the simplest and
least likely to be enacted. is the plan that allows no deductions or ex-
emptions and imposes a 10 to 15 tax on everybodyperiod!
Another plan reduces the number oI deductions allowed but in-
cludes deductions Ior home mortgage interest. charitable contribu-
tions and medical and health costs. It also provides Ior a base exemp-
tion Ior the extremely poor and provides exemptions Ior dependents.
The Bradley-Gephardt plan may be part oI the Democratic plat-
Iorm in 1984. It provides Ior deductions Ior mortgage interest. social
security income and veterans beneIits. state and local taxes and
charitable contributions. It is a graduated tax although it is called a
Ilat-rate tax. Under its dictates. about 75 oI the population would
pay 14 graduated up Ior the last 25 oI the population to a max-
imum rate oI 28. It is suggested that because there would be no
loopholes and thereIore better compliance could be anticipated.
there would actually be an increase in revenue. By eliminating capital
gains and other Iavorable tax treatment oI unearned income the
wealthy are supposed to end up paying more than under our present
system.
CONSUMPTION OR EXPENDITURE TAX
A consumption tax. sometimes called a progressive expenditure tax.
is like our present income tax except anything saved or invested
would be deducted Irom income beIore actual tax due was com-
puted. II anything was withdrawn Irom savings and consumed. that
amount would be added to the taxable income Ior that year. Income
Irom capital gains not reinvested would come under the same rule.
Any amounts borrowed could be added to income in the year bor-
rowed and deducted Irom income in the year or years repaid. Even
simpler would be the alternative oI ignoring the debt altogetherno
more adding in one year and subtracting in another. The simplest
solutions are oIten the best!
One large advantage is that the expenditure tax stimulates sav-
ings and eliminates the complexities currently surrounding capital
gains and depreciation. The expenditure tax would be expected to
raise United States national income 3 or more each year.
263
Such a tax would be neutral between savings and spending;
citizens would save the same portion oI their savings as they would
in a tax-Iree world. In a study entitled. "Blueprints Ior Basic Tax
ReIorm." William Simon suggested less paper work would be involv-
ed in an expenditure tax than under our current tax system. The op-
position comes Irom those who claim the upper bracket people
would do most oI the saving and investing thereby deducting those
amounts Irom their taxes and transIerring a heavier burden to the
less aIIluent. People with substantial assets are now able to let
unrealized capital gains accrue untaxed while wages and savings ac-
count interest are immediately taxed. Actually. under an expenditure
tax. the middle class would be brought more in line with the wealthy
because the tax is based on the amount a person takes out oI the
economy while an income tax is concerned with how much he con-
tributes. The high living portions oI society would end up paying Iar
more revenue and the middle class would get a break so that they
could increase their savings. Actually our present system does in Iact
incorporate some oI the Ieatures oI such a tax with its tax-Iree pen-
sions. IRAs and taxation oI capital gains only when realized. etc.
GOALS
Americans. collectively as well as individually. must have goals.
What is socially acceptable needs to be reevaluated. As a nation we
are responding not going Iorward purposeIully as are other nations.
notably the Japanese and Soviets who have well-deIined ideologies
which have made the people willing to accept sacriIices in order to at-
tain these national goals.
Politicians are always Iollowers not leaders oI opinion. Perhaps
the closest we have come to Iormulating national goals was way
back in the 18th century when our ancestors ratiIied the U.S. Con-
stitution. Having discounted our legislators because oI their
dependence on pressure groups to make up their minds Ior them. it
seems clear the courts then are the sculptors oI our national goals.
Societies Irom earliest time have encountered the same problems on-
ly in varying degrees and on diIIerent scales. Eskimos and certain
American Indians are supposed to have dealt with the problem oI ad-
264
vanced age by abandoning the elderly whereas the Oriental cultures
honored. protected. served and revered those oI advanced age and
all ancestors. Human sacriIice. inIanticide. cannibalism. polygamy.
euthanasia. torture. all have been socially acceptable to groups oI
human beings at one time or another. Crusaders in the middle ages
wreaked untold carnage in the name oI universal truth to which the
unenlightened were sacriIiced. It is time to Iace the Iact that it is man.
although he may be divinely inspired. who decides what values a
society will embrace and oIten on rational and popular grounds. A
case in point is home ownership; is it as desirable in the 1980s as it
was in the 1940s or 50s? Should it be encouraged today and at what
sacriIice? Is it a good in itselI or would society do better to inIluence
our younger generation towards condominiums and smaller more
temporary shelters? Perhaps conservation oI resources. saIety. en-
couragement oI docility or other notions are more worthy oI attain-
ment. Tax legislation allows society to express its values by en-
couraging saving or investments in certain "desirable" areas. Funding
abortions or exempting charitable or religious institutions is con-
troversial because taxes collected Irom everybody are used to
enhance the belieIs oI some as against the belieIs oI others. In Iact.
the incredible complexity oI our tax system today has evolved as a
response to support these special interests. Such complexity may no
longer be socially acceptable.
When it comes to taxes. many groups similarly appeal to what
they claim are indisputable truths; that the old. the young. the inbe-
tween; are all entitled to this and this and this! By what authority
surely not because we are human. so it must be because we are
Americans and our courts over time have interpreted "... the pur-
suit oI happiness" as meaning the assurance thereoI; the "general
welIare" as encompassing everything Ior everybody iust as there is
conceivably nothing that is outside interstate commerce as the
courts' interpretation oI the commerce clause in our Constitution
evolved over 200 years.
Up until Franklin Delano Roosevelt's second administration there
was almost universal agreement that government's role in the lives oI
its citizens should be kept to a minimum. Adam Smith whose book.
Wealth of Nations. had a proIound eIIect on the Iramers oI our Con-
265
stitution. saw the ideal society as a place where voluntary coopera-
tion among individuals Ilourishes and in which each person is Iree to
use his own abilities and resources as he chooses in accordance with
his own belieIs so long as he does not interIere with the right oI others
to do likewise.
Milton Friedman has argued that the greatest danger to Iree enter-
prise lies with the intellectuals who are in Iavor oI Ireedom Ior
themselves and against it Ior everyone else and the business corpora-
tions who think everybody else should be Iree (independent) but are
against it Ior themselves. Freedom Ior them would entail giving up
tariIIs. subsidies and special provisions in the tax code.
The popular columnist. Ellen Goodman. in one oI her pieces
recently expressed the view that everything is up to "Big Brother."
She discussed the "patience" oI the unemployed which was about to
run out waiting Ior the Reagan Administration to rescue them.
President Kennedy. when Iaced with what was in those days a
whopping budget deIicit oI 4 billion and a bJz unemployment
rate. convinced a deIiant Congress that a balanced budget could not
be achieved by raising taxes. He discussed his Iear that the big
spenders would soon be oII on another round and we'd end up with
deIicits all over ad inIinitum. Kennedy instead cut income and cor-
porate taxes and increased deIense spending at the same time. It's
strange that our current president. who is oIten reIerred to as hard-
nosed. stubborn and conservative. seems to emulate both John Ken-
nedy and Franklin Roosevelt whom the media have depicted as two
oI our most compassionate and liberal presidents. In Iact. it is sur-
prising how much like our current Republican President Franklin
Roosevelt sounded in a speech he gave on October 19. 1932:
"II the nation is living within its income its credit is good. II in
some crisis it lives beyond its income Ior a year or two it can
usually borrow temporarily on reasonable terms. But iI. like the
spendthriIt. it throws discretion to the winds. is willing to make
no sacriIice at all in spending. extends its taxing up to the limit oI
the people's power to pay. and continues to pile up deIicits. it is
on the road to bankruptcy."
A deIicit can be Iinanced only by printing dollars which imposes
the hidden tax oI inIlation (remember our earlier discussion oI inIla-
tion; more dollars chasing the same amount oI goods inIlation) or
266
borrowing which removes needed Iunds Irom the private to the
public sector. plus. oI course. the additional cost oI interest.
No election has ever been lost on the basis oI inIlation. but
Hoover lost in 1932 and Nixon in 1960 on the basis oI unemploy-
ment. The average citizen understands unemployment only too well
and doesn't understand the ravages oI inIlation.
LIMITING GOVERNMENT SPENDING
An inIinite number oI worthwhile and desirable proposals are con-
stantly submitted to Congress. With no limitations on the budget.
the list oI wants continues to expand. Limiting government to spend-
ing a set Iraction oI its income is more important than balancing the
budget. The public's appetite in this realm is insatiable and a con-
stitutional amendment is the only way to limit that appetite or be
consumed by it.
The Iounding Iathers knew every individual issue should not be
decided by a maiority vote. For instance. iI it were not Ior the First
Amendment's guarantee oI Iree speech. a maiority would prevent the
Nazis Irom voicing their opinions. or the Jews or the Baptists or peo-
ple with red hair or handicapped. etc.; any group that could not
muster a maiority.
The First Amendment simply states that it is not the government's
business to decide who can speak; it is a guaranteed right. Similarly.
the idea behind the constitutional amendment to limit government
spending is that the budget should not be leIt to legislators but that an
amount oI money determined by the people will be provided and
within those conIines the legislators will have to allocate dollars to
the myriads oI good programs clamoring Ior Iunding. It has been
easy Ior them in the past to play the part oI the "good guy" and Iund
them all. but with whose money?! The people. iI they have had
enough. must draw the line. II what we've been hearing lately in the
media is any indication then a lot oI citizens are ready to say along
with Howard Beale in Network. "I'm mad as hell and I'm not going
to take it anymore!"
267
WHO'S TO BLAME?
We always ask who is responsible; Americans have an almost inor-
dinate need to place blame. The answer must be: "The Do-Gooders."
Why? Because they used other people's money (taxes). conIiscated
by Iorce (law). as opposed to seeking voluntary contributions as
non-government entities had done in previous years. Some groups
would claim. iI the cause were worthwhile and aroused the compas-
sion and support oI enough people it would have Ilourished within
the private sphere; witness Red Cross. Salvation Army. Goodwill In-
dustries. etc. II that support was not Iorthcoming Irom citizens. then
perhaps the program shouldn't have been undertaken with govern-
ment Iunds. In this regard we already mentioned the Ioresight oI our
Iounding Iathers in not making this nation "maiority rule" where
minority rights would be abridged. A case in point is the recent
legislation aIIecting orphan drugs. Our legislators decided minority
diseases should have subsidized research. Since not enough people
would directly beneIit Irom the research. private companies would
not Iind such research economic and it would not have been under-
taken without government intervention in the Iorm oI subsidies. The
trouble with the "Do-Gooders" is the Iact that it is impossible to be as
careIul with someone else's money as you would be with your own.
Carelessness and waste are inevitable and that was acceptable at Iirst
because at the beginning there were more people to pay than there
were those seeking help. It didn't take long. however. Ior the "needs"
to mingle with the "wants" and as they both grew. more and more in-
terest groups iumped on the bandwagon.
How do you wind down social programs? It is notoriously more
diIIicult to cancel a program or delete a law than to enact a new one.
It is easier to keep on a course oI more government involvement but
iI we do we may well Iind ourselves in a Iinancial crisis with the resul-
tant loss oI Ireedom that would imply. II a halt is called it will be
motivated by disillusionment with "Big Brother" and government in-
eIIiciency.
The worksheet at the end oI this chapter has a list oI priorities.
You may be surprised to discover iust what you value most when it
comes right down to it.
268
In order to recommend a course oI action to achieve an obiective.
we must Iirst know whether that course oI action will in Iact promote
the obiective. That the obiective itselI is desirable can only be deter-
mined by weighing the consequences oI not winding down our
worthwhile social programs. We iust cannot aIIord any longer to in-
dulge mindless rhetoric such as: "A rich country like the United
States should be able to ..." This "rich" nation is 1.5 trillion dollars
in debtthe interest alone is 100 billion dollars per year. That's
$33.120.000 per day going out in interest' Or to put it another way:
every man. woman and child in the United States owes $60.000! We
have not even mentioned the unbelievable Iact that our government
has guaranteed (bank loans. bonds. pension Iunds. etc.) two or three
times our current debt!!! The poorest citizen is in Iar better shape
than the Iederal government.
As in every chapter in this book. I do not propose solutions Ior
you. I only hope to stimulate you to seek the answers Ior your own
sake. II not vou. who will decide these things?
269
WORKSHEETCHAPTER TWENTY-ONE
1. Number your priorities-140
____nicer home in better neighborhood
____better automobile
____boat
____airplane
____swimming pool
____extra time and money for travel
____private schooling for kids
____more income
____less taxes
____more and better police protection
____more and better fire protection
____better libraries with longer hours
____better public transportation
____cheaper public transportation
____more consumer protection
____no more nations falling to communism
____revival of free enterprise
____communism to flourish
____democracy to flourish
____socialism to flourish
____better public education for all
____America to maintain #1 status as world leader
____America to avoid war
____clean air
____forests and oceans protected
____medical research with new breakthroughs
____better health care
____cheaper health care
____no communist domination of America
____no socialism in America
____more efficient courts
____better maintained roads, bridges, dams, etc.
270
more parks
more social services (chiid care, senior programs,
etc.)
expanded space program
more children
freedom to worship
better prisons
less regulation by government
right to dissentpicket, criticize, strike
271
RECOMMENDED READING
CHAPTER TWENTY-ONE
DIFFERENT POINTS OF VIEW
You will be stimulated intellectually by reading any books by:
Ludwig von Mises
Friedrich A. Hayek
C. Northcote Parkinson
Milton Friedman
John Galbraith
Robert Heilbroner
William E. Simon
Howard RuII
Robert Ringer
Harry Browne
Douglas Casey
Andrew Tobias
Ayn Rand
Adam Smith'
The Richest Man in Babvlon. by George Clason
An Introduction to Economic Reasoning. by Robinson-Morton-
Calderwood
The Capitalist Reader. edited by Lawrence Stepelevich
How Much More Equalitv Can We Afford? by Edgar Browning
Who Bears the Tax Burden? by Pechman and Okner
The World of Andrew Carnegie. by Louis Hacker
The Income Tax. Root of All Evil. by Frank Chodorov
Believing in America. by Bud Shuster
The Spirit of Democratic Capitalism. by Michael Novak
The Next 200 Years. by Herman Kahn
The Golden Egg. by Gerald Carson
Revolt of the Haves. by Robert Kuttner
Half Wav to Tax Reform. by Ruskay and Osserman
The California 2000 Campaign. by James Stanbery
How to Cope with the Developing Financial Crisis. by Ashby
Bladen
272
The Fleecing of America. by William Proxmire
Minding Americas Business. by Magaziner and Reich
Small Is Beautiful. by E.F. Schumacher
Economics from the Heart. by Paul Samuelson
Human Options. by Norman Cousins
The Truth About Supplv-Side Economics. by Michael Evans
Dangerous Currents. by Lester Thurow
Making America Work Again. by J. Morton Davis
Budgeting for America. by Congressional Quarterly. Inc.
1414 22nd Street. N.W.
Washington. D.C. 20037
273
Fat Ed the Hopping Cop
(For explanation of mnemonic, see pp. 279 & 280)
COP = probate estate
HOP = gross estate
274
SECTION SIX
22
Obiectives
We have come to one oI the most important sections in this book.
Not all oI you. despite my recommendations. will Iormulate goals
and periodically reexamine your lives. nor will all oI you purchase
insurance or invest in the stock market or buy real estate but as the
saying goes: "There's one thing certain in liIe; death and taxes."
At the beginning oI this book I expressed the view that it was un-
Iortunate that people associated estate planning with death because it
prevented them Irom giving estate planning the consideration it
demands. People tend to put oII thinking about death. However.
everything we have discussed in chapter one through twenty-one has
relevance Ior estate planning; in Iact estate planning is almost
synonymous with Iinancial planning only "more so"! Estate planners
usually have expertise in drawing wills. Iorming trusts and have
knowledge about the laws providing Ior the transIerence oI property
aIter death. It is not surprising then that most estate planners are
lawyers.
There are many excellent books in the recommended reading sec-
tion. most oI which cover estate planning more thoroughly than I
will attempt to do in this section. Estate planning is a subiect Ilexible
enough to embrace a variety oI opinions and you should certainly
read more than one author beIore you set about Iollowing advice.
Even though the CaliIornia State Bar has recently come out with a
Iorm Ior a do-it-yourselI will. attorneys oIten warn against a layman
277
executing a will without proIessional advice (by the way. so does the
CaliIornia Bar except in the simplest situations and when a person
would otherwise be totally without a will because he would not seek
proIessional advice). Books authored by attorneys generally include
stories about amateurish attempts at transIerring assets or reducing
taxes with unIortunate results. while the non-attorney authors
always seem to have as one oI their prime obiectives. the avoidance
oI attorney and court Iees. Attorneys are aware oI pitIalls that are
not apparent to the layman planner. It is not surprising then that I
wish to stress the importance oI proIessional advice. particularly in
the area oI estate planning. Laws vary Irom state to state and change
continually. The lawyer who has prepared your will and trust
agreements will inIorm you oI these changes as they occur.
"FAT ED THE HOPPING COP"
THREE KINDS OF ESTATES
Your "probate estate" consists oI all the property that is disposed oI
by your personal representative aIter your death. That represen-
tative will be either the court-appointed administrator iI you die in-
testate or the executor oI your choice iI you make a will. In this
chapter we will discuss some ways oI avoiding probate by having
property pass according to the dictates oI instruments you set in mo-
tion during your liIetime such as living trusts with directions that
trust property pass to trust beneIiciaries upon the trustor's death. or
having property pass due to survivorship rights (ioint tenancy) or
ioint bank accounts. With proper planning. many assets would pass
directly to beneIiciaries or ioint owners without ever passing through
the probate court. It is not necessarily desirable to completely avoid
probate. however. Most people would not care to relinquish all their
property to others beIore their death and would want to leave
enough assets in their estate to pay Iuneral and death-related ex-
penses. current debts and taxes.
The main reasons given Ior avoiding probate are: (1) Probate can
be costly. Fees (court. executor. attorney) are generally based on the
size oI the estate to be administered (percentage). (2) Court records
are "public knowledge." (3) Creditors can reach your assets in pro-
278
bate by submitting claims. (4) Heirs may contest a will. (5) Death
taxes may shrink the estate. (6) It may take a long time Irom the date
oI your death to the distribution oI the assets to your heirs.
We are going to examine three types oI estate: your probate es-
tate (COP). your gross estate (HOP). and your net estate (FAT ED).
COP
THE PROBATE ESTATE CONSISTS OF:
C common ownership property
(example your interest as a tenant in common)
O outright ownership oI property
(ownership in your name only)
P proceeds oI liIe insurance or other death beneIits payable to
your estate
The probate estate is actually all the property that becomes a concern
oI your executor or administrator upon your death.
HOP
THE GROSS ESTATE IS YOUR ESTATE FOR TAX PURPOSES:
H halI oI iointly owned property (with spouse) and all the value
oI property owned iointly with right oI survivorship with
others except to the extent that "others" can show they con-
tributed to the purchase price oI the property.
O ownership oI liIe insurance on your own liIe
P all the property in the probate estate (above)
You can see the gross estate is larger than the probate estate. BeIore
taxes are levied against your estate. certain deductions and credits
are allowed. Marital deductions may exempt your entire estate Irom
taxes iI it is valued at $600.000 or less in 1987 (see page 292) and iI you
choose to take up to the Iull amount oI credit allowed. Remember
279
this is not always the best decision so consult your proIessional ad-
visor in light oI the trust discussion on pages 292. 297-299.
FAT ED
THE NET ESTATE IS WHAT ACTUALLY PASSES TO YOUR
HEIRS:
F Iuneral expenses are deducted
A administration expenses are deducted
T taxes are deducted
E evervthingall assetsthat Irom which you are deducting
D debt is deducted beIore distribution to the heirs.
This should give you a general view oI the three kinds oI estates.
The remainder oI this chapter will discuss the main obiectives oI
estate planning.
REDUCING THE COST
OF ESTATE ADMINISTRATION
II you die intestate (without a will). a court-appointed administrator.
even though usually a close Iamily member. must post a bond. the
cost oI which will be charged to your estate. You can. however. in
your will. waive the posting oI a bond by your chosen executor.
The administrator's powers are derived Irom statutes and rarely
include the Ilexibility needed to deal with the estate in an eIIicient
manner. II stocks are involved and the market takes a downturn the
estate is likely to suIIer heavy losses beIore a court order can be ob-
tained authorizing the administrator to sell. In most states the sale oI
securities or real estate and the settling oI claims requires iudicial
authorization which is costly in terms oI both time and money. The
administrator is hindered in his management because oI restrictions
280
as to percentages and types oI investment. The restrictions are an at-
tempt to protect the estate but too oIten have the opposite eIIect.
CHOOSING THE EXECUTOR
Choosing the executor. the person who will carry out your wishes
aIter your death. is oI utmost importance. The executor. like the
court appointed administrator or any trustee in charge oI properly
carrying out the terms oI a trust. is considered to be a Iiduciary. A
Iiduciary is basically someone acting Ior another under the highest
possible standard oI care and with whom he stands in a unique rela-
tionship oI conIidence and trust. The smaller the estate the more im-
portant the selection oI the proper executor becomes. One with no
knowledge oI Iinancial matters could end up losing all the estate's
assets rather than only shrinking them as could happen in the case oI
a larger estate. As mentioned earlier. a court appointed ad-
ministrator is highly restricted in his actions precisely to guard
against such a happening. However. you have the right to enlarge
the duties and responsibilities oI your executor. Even though the ex-
ecutor can rely on the advice oI a lawyer or investment counselor.
paid Ior by your estate. it is he and no one else who is ultimately
responsible Ior all decisions and their implementation; it is he who
must Iace the wrath oI any beneIiciary who Ieels he has suIIered as a
consequence oI the executor's neglect or incompetence. You should
be aware oI the commitment you are asking oI a proposed executor
in terms oI time and responsibility. Business and investment ex-
perience. integrity and compassion together with a genuine concern
Ior the welIare oI the beneIiciaries oI your estate is a hard combina-
tion to Iind in any one person. OIten the best solution is provision Ior
co-executor-trustees with both the trust department oI a bank and a
Iamily member serving iointly. The bank would provide the more
proIessional and obiective Iinancial management and the Iamily
member would naturally have a better understanding oI the needs oI
the various Iamily members. However. trust departments will nor-
mally only serve as executor oI rather substantial estates and this
may prevent such an option being a viable solution Ior most oI us.
In discussing wills and trusts. arguments will be presented Ior and
281
against Ilexibility. but it should be apparent Irom the Ioregoing
discussion that granting your executor (and/or trustee) the power to
do virtually anything that you could do with your property iI you
were living. is. even though admittedly unrealistic. what you are
aiming Ior in selecting an executoran extension oI yourselI!
DETERMINING HEIRS
There are no set rules in this area other than the intestacy laws which
decide who is to get what aIter you are gone iI you abdicate that
responsibility by Iailing to make a will.
Each Iamily situation is unique and although the intestacy laws.
which vary Irom state to state. try to be Iair. they cannot possibly
take into consideration the Iact that one oI your children is handicap-
ped and needs more assets and security than the others; that another
child has accumulated a very large estate on his own and most oI
what you could give him would only push him into a higher tax
bracket neutralizing the beneIit; that your spouse could never live as
you would like on the share the courts would award by law. You
know your assets and the people to whom you would like to transIer
those assets. The Iirst goal oI estate planning is to put vou in charge;
make vou master oI your own plan!
THE ROLE OF INSURANCE
In section two oI this book we discussed insurance as a means oI pro-
viding an instant estate primarily Ior young people who have not
had suIIicient time to build an estate through investments and sav-
ings. An adequate liIe insurance program is still the most common
method used to provide dependents with a comIortable income in
the event oI an insured's untimely death.
Providing Iinancial support is a prime obiective oI estate plan-
ning. especially when several young dependents are involved. It may
be less important when children are grown and on their own and cer-
tainly iI your spouse has already achieved Iinancial independence.
282
PROVIDING LIQUIDITY
There are a number oI claims and taxes an estate is responsible Ior
upon the estate owner's death. For instance: hospital. medical and
Iuneral expenses; personal debts to individuals. banks or unpaid
bills; state and Iederal estate taxes and court and attorney Iees can all
add up to quite a responsibility.
When we speak oI liquidity needs oI an estate. we reIer to the
cash required to cover these costs. II adequate planning has not
preceded the estate owner's death. needless losses may occur to the
estate due to a Iorced sale oI assets or business interests. II the estate.
through careIul planning. had suIIicient liquidity such sale need
never take place and the estate would be distributed to the
beneIiciaries intact. II some assets had to be sold. planning would
allow the executor to take advantage oI timing and the best
marketing skills in order to obtain the maximum value Irom those
assets.
BUSINESS CONSIDERATIONS
II a portion oI your estate consists oI business interests such as a pro-
prietorship. partnership or membership in a closely held corporation
(a corporation not traded on a recognized stock exchange but held by
a close group like a Iamily) there may be a problem oI setting a value
upon those holdings Ior estate tax purposes. Since there may be a
limited market Ior such interests. the valuation is reached in a round-
about manner.
First. the underlying worth oI the business is determined by look-
ing at earnings. the capacity to pay dividends. the net asset value and
market comparisons with similar businesses; then discounts are
allowed Ior a variety oI reasons having to do with the non-
marketability oI the asset to the public at large. Naturally the dis-
counts result in a low value Ior such interests and save estate taxes as
well as making liIetime giIts an attractive tool Ior transIerring assets
Irom the estate inexpensively. For these and other reasons your at-
torney may even advise Iorming a closely held corporation.
The other reason business interests demand serious consideration
283
when planning Ior the preservation oI an estate's assets concerns the
situation where business interests make up the bulk oI the estate. As
mentioned earlier. iI liquidity has not otherwise been provided.
business interests may have to be sold to cover taxes and other ex-
penses with resultant large losses Ior everyone involved. Surviving
partners or shareholders may Iind themselves forced to terminate a
proIitable business unless plans were made as to the procedure to
Iollow when a partner or owner dies.
One way to ensure that claims can be paid without a Iorced li-
quidation oI estate property is to borrow the money Irom a source
outside the estate according to a pre-arranged plan. LiIe insurance
proceeds paid on the estate owner's death to a beneIiciary outside the
estate who agrees to make the money available Ior the estate's use is
an example. This party may be a liIe insurance trust set up iust Ior
this purpose or an heir who would not want to witness any shrinkage
oI estate assets and thereIore agrees to loan the money. A provision
authorizing the trustee to make loans to the trustor's estate can be in-
serted in a Iunded living trust. Also buy-sell agreements. discussed in
the next chapter. are Irequently used to provide liquidity via liIe in-
surance proceeds.
Under certain conditions. section 303 oI the Internal Revenue
Code permits a corporation to redeem enough stock Irom a deceased
shareholder's estate to pay death taxes. Iuneral expenses and other
costs associated with the administration oI the deceased's estate
without creating a taxable dividend to the estate or heirs. A condi-
tion Ior qualiIying under section 303 is that the value oI the deceased
shareholder's stock in the corporation comprised at least 35 oI his
entire adiusted gross estate (FAT ED).
For example: II the estate were valued at $1.000.000 and the ex-
penses demanding liquid assets totaled $100.000 then the gross ad-
iusted estate would be $900.000. II more than $315.000 (35) oI the
estate were stock in a closed corporation then the liquid assets could
be obtained by selling stock back to the corporation without its being
counted as a taxable dividend.
284
TRANSFER OR DISTRIBUTION OF PROPERTY
Creation oI an estate is only halI the battle; providing Ior its conser-
vation is the other halI. Deciding on the best methods oI transIerring
what you have so painstakingly built up is the subiect oI chapter
twenty-three. Without a well-designed plan oI transIer. your assets
may well disintegrate and with them the dreams oI your children's
Iuture. your business' growth and the expansion oI that charitable in-
stitution you have sought to achieve.
Erosion is most likely to occur at the time assets are transIerred.
We've already mentioned the corrosive eIIect oI administration
costs. liquidation losses when sales take place at inopportune times in
order to meet the cash demands oI an estate. and poor management
oI estate assets. In chapter twenty-three we will discuss what used
to be the biggest bite oI allestate taxesand you will see how re-
cent legislation has made it possible to pass on more oI your estate
with the least possible tax cost.
SUMMARY
We have looked at some oI the obiectives oI estate planning: pro-
viding security and a sense oI well-being Ior the principal. Iinancial
support Ior dependents. reducing costs oI administration by reduc-
tion oI the estate through giIts. providing liquidity primarily with
insurance proceeds. maintaining business interests intact; ensuring
equitable (not equal) treatment Ior beneIiciaries. and establishing a
plan Ior transIerring assets. Some oI these. along with additional
obiectives oI estate planning will be considered more Iully as you
read on.
285
WORKSHEETCHAPTER TWENTY-TWO
ESTATE PLANNING
1. What portion of your estate will pass outside probate and
what amount will pass through probate according to the dic-
tates of your will? Are you happy with the present ar-
rangements?
2. What provisions have been made to enable your estate to
meet its liquidity needs?
3. Are you coordinating the new unified credit allowances
with the unlimited marital deduction to avoid "overqualify-
ing" your estate? Do you need help in qualifying the most
beneficial amount of property for the marital deduction?
4. Are you making proper use of trusts in your estate plan-
ning?
5. Have you coordinated your planning with other family
members with potentially large estates? (grown children,
own parents, etc.)
6. Have you considered "gifting" property with high poten-
tial for appreciation while it is still valued low?
7. Have you planned adequately regarding your business in-
terests?
a) What provisions have been made for the continual
operations of your business when you or one of your
associates dies, is disabled or retires?
b) Can working capital be kept intact? How?
c) s the business readily marketable if it should have to be
286
sold? Has a price been established or means of determining
a price agreed upon?
d)Will this value affect the liquidity needs of your estate?
How?
e)Can ownership in the business be transferred without
decreasing the value? How?
f) Just how can the business continue providing for your
heirs in the event of your death?
8. Your planning should be reveiwed with an attorney if any
of the following take place after a will or trust has been
drafted:
a) You move to another state.
b) The birth of a child or grandchild.
c)f there are special circumstances relating to a child
such as a disabling handicap.
d) The death of a child or grandchild.
e) The adoption of a child.
f) The marriage or divorce of a child or grandchild.
g) Your own marriage or divorce.
h) Death of a spouse.
i) Special needs relating to health, education, business or
travel.
j) A marked increase in personal wealth such as a
substantial inheritance or gift.
k) A marked decrease in personal wealth as evidenced by
a business setback or making of a large gift.
287
) You join a new profit sharing or pension plan.
m) You purchase additional life insurance policies or an-
nuities.
n) You purchase real property or other equity investments.
288
23
Methods of
Estate Transfer
In this chapter we will be examining several methods oI estate
transIer. At death property is most commonly transIerred by the law
oI intestacy. the dictates oI a will or the manner in which title is held.
Instructions in testamentary trusts are also used to transIer property
aIter the settler's death. We'll explore the advantages and disadvan-
tages oI making liIetime giIts. providing Ior buy-sell agreements.
creating powers oI appointment. establishing living trusts. and
deciding how employee death beneIits and insurance proceeds
should be received.
FORMS OF PROPERTY OWNERSHIP
Property may be owned outright by a single individual who can
dispose oI it in any manner he chooses (Iee simple). Property owned
by more than one person may be held as "tenants in common" which
means that each person (any number) owns a deIined percentage oI
the entire property. This percentage interest can be treated by the
owner in the same manner as he treats the property he holds
outright. The property interest may be disposed oI by will or. in the
absence oI a will. according to the laws oI intestacy. It may be given
away. sold. leased. mortgaged and taken by creditors.
289
Joint tenancy. with right oI survivorship. is another common
Iorm oI ownership. When a ioint tenant dies (and there may be more
than two ioint tenants in a single property) his interest automatically
passes to the surviving ioint tenant(s) by operation oI law. The last to
survive will Iind himselI the sole owner. Iree to dispose oI the proper-
ty in any manner he pleases.
In community property states (Texas. Washington. Idaho.
Nevada. New Mexico. CaliIornia. Arizona. Louisiana and Puerto
Rico) most property that is acquired during marriage is considered to
be community property in which each party holds and controls an
undivided one-halI interest. Community property iurisdictions
generally recognize separate property also and give the owner spouse
complete control over it. Separate property is property which the in-
dividual acquired prior to the marriage. inherited during the mar-
riage or purchased with individual (not community) Iunds. So as not
to get bogged down on a subiect which could easily take up this en-
tire chapter. let me reIer you to the recommended reading list at the
end oI this chapter as well as at the end oI chapter thirteen.
The reason it is important to become Iamiliar with the several
Iorms oI property ownership or to consult an attorney with the
necessary Iamiliarity. is that transIer is automatically eIIected by
some Iorms oI ownership whether you planned it that way or not.
Your will is operative on certain types oI ownership and not on
others. You are entitled to dispose oI only your halI oI anything con-
sidered to be community property. You can well imagine the com-
plications that arise when property supposedly held as tenants-in-
common or as ioint tenants is Iound to have been purchased with
community property Iunds!
Many times people who are well meaning but have little
knowledge oI the legal consequences emanating Irom the way in
which title to property is held. attempt to advise you in this area.
Beware! This is the domain oI a proIessional versed in the laws
peculiar to your state.
290
GIFTS
Thanks to the Economic Recovery Act oI 1981 (ERTA) it is now
possible Ior a donor to give an unlimited amount. tax-Iree. on behalI
oI a third party donee directly to an educational institution Ior tui-
tion or to a health care provider Ior medical expenses. Additionally.
a person is able to give $10.000 annually to as many persons as he
would like (or better can aIIord) $20.000 iI his spouse ioins in the giIt
("splitting"). without incurring tax liability Ior his generosity.
II a liIetime giIt is a capital asset the donee (receiver) takes the
donor's basis. II it is a testamentary giIt (passing on the donor's
death) it would receive a new stepped-up basis equal to its Iair
market value as oI the date the donor died. For example: iI A bought
stock Ior $5.000 Iive years ago and giIts the stock. now worth $9.000
to B. B's basis in the stock is $5.000. II B sells the stock two years later
Ior $10.000 he is then liable Ior long-term capital gains tax on $5.000
even though the stock only went up $1.000 on the market during the
time he owned it. However. iI at A's death the same stock was leIt to
B. who two years later sold it Ior $10.000. B would have to pay a
long-term capital gains tax on only $1.000. At A's death the stock ac-
quired a new stepped-up basis equal to its Iair market value at the
time oI A's death. which in the example. we established at $9.000.
ERTA removed a Iormer rule (Internal Revenue Code Sec.
2035(a) ) which required that transIers within three years oI death be
included in the gross estate oI the donor. However. this requirement
still holds true Ior liIe insurance policies. Also in order to discourage
potential heirs Irom transIerring property in contemplation oI the
donee's death simply in order to obtain a new step-up basis upon re-
ceipt oI the property back Irom the donee's estate. ERTA provides
that such property. iI given within one year oI donee's death. shall re-
tain as its basis the basis attributed to the decedent immediately prior
to death. No immediate step-up in Iair market value was allowed.
Still liIetime giving has certain advantages over bequeathing
property at death. For one thing. the giIt is removed Irom the donor's
estate and thereby escapes estate taxes and administrative expenses
which are generally based on the value oI the estate. II the donee is in
a lower tax bracket than the donor. any Iuture appreciation and cur-
291
rent income will be taxed at the donee's lower tax rates and the
donors can witness the enioyment and pleasure generated by their
largess.
Assuming a person does not exceed his annual giIt exclusion
limits at any time during his liIe. that is that he never gives any more
than $10.000 ($20.000 "splitting") a year to any one person. then at
his death he could leave up to $325.000. Iree oI any Iederal estate tax-
esthat is iI he died in 1984. (See table below)
The tax reIorms oI 1976 replaced the Iormer giIt tax liIetime ex-
emption and the estate tax sepciIic exemption with a uniIied credit.
Remember a credit reduces the "tentative tax" dollar Ior dollar not
iust the "taxable gross"; a credit is thereIore worth much more than
an exemption. For example. a $192.800 credit is the equivalent oI a
$600.000 exemption in 1987. ERTA raised that credit in steps begin-
ning in 1982. A partial table Iollows:
Year oI death
or UniIied Exemption
year giIts made Credit Equivalent
1984 $96.300 $325.000
1985 121.800 400.000
1986 155.800 500.000
1987 on 192.800 600.000
Even iI a married person had an estate in excess oI $600.000 in
1987. he could pass everything to his spouse tax-Iree because ERTA
provided Ior an unlimited Iederal estate and giIt tax marital deduc-
tion. However. iust because you can transIer everything to the sur-
viving spouse's estate without paying Iederal estate taxes. does not
by any reasoning suggest you should do so! Many times taxes will be
lower iI the estates are taxed more evenly rather than reserving a
whopping tax on the estate oI the second spouse to die. Overuse oI
the marital deduction in some instances. could actually result in a
wasting oI the uniIied credit. Your proIessional advisor will help you
decide the best way to go. But remember. a great many things must
be considered. Full use oI the marital deduction should not be made
as a matter oI course beIore careIully weighing alternatives.
I have not mentioned the special rules regarding giIts to minors.
292
giIts oI Iuture interest. giIts made prior to the creation oI the uniIied
credit. etc.. so Ior more inIormation reIer to the recommended
reading list on page 306 and Ior advice on your own unique situa-
tion. see your tax attorney and/or accountant. As with all areas in
this book. my goal is to whet your appetite Ior more inIormation and
suggest sources Ior acquiring it. The inIormation should help you
understand better the inherent dangers in trying to be a "do-it-
yourselIer" in this area and should convince you oI the savings pro-
Iessional advice can deliver.
BENEFICIARY ARRANGEMENTS
Death beneIits payable under pension plans. deIerred compensation
agreements. tax-sheltered annuities. proIit-sharing plans. IRAs and
Keogh plans are another way Ior an owner to transIer what would
otherwise have been part oI his accumulated estate to a chosen
beneIiciary and in some instances escape Iederal taxation. Whether
to make the employee's estate the beneIiciary oI death beneIit
payments under pension and any oI the other employment-related
plans was oI greater importance beIore ERTA and the uniIied credit
and unlimited marital deduction discussed above. The Iact that there
may be considerable income tax savings iI one elects to take ten-year-
averaging and a lump sum payment must be balanced against any
possible estate tax savings which might have to be given up in order
to take advantage oI this beneIit.
Certain qualified employee beneIit plans. Keoghs. IRAs. etc.. en-
ioy all kinds oI tax advantages (see "Lump Sum" discussion in
chapter seventeen and "Retirement Plans" in chapter twenty). one
being that Ior Iederal estate tax purposes. distributions to a deceased
participant's personal beneIiciary are excludable Irom the partici-
pant's gross estate as long as they're not taken in a lump sum. II you
want the income tax savings available with ten-year-averaging then
beneIits can be received in installments over not less than 36 months.
However. a lump sum distribution to a personal beneIiciary is not
subiect to estate taxes (we're still talking about the deceased partici-
pant's or employee's estate) iI the beneIiciary irrevocably elects not
293
to take ten-year averaging and the special capital gains tax treatment
that goes along with it.
At any rate. whether savings come Irom taxation (ten-year-
averaging) or estate taxes. assets are passed Irom the participant in
many retirement plans simply by an election to designate a third par-
ty beneIiciary.
LIFE INSURANCE PROCEEDS
LiIe insurance oIten makes up a sizeable portion oI one's estate. With
careIul planning. proceeds can pass tax-Iree outside probate. which
means no Iederal estate tax will be levied nor will the proceeds add to
the cost oI the estate's administration since none will be required. As
we discovered when talking about sources oI liquidity Ior an estate.
there may be valid reasons Ior having the insured own his own policy
and having the proceeds paid directly to the estate. Yet another. and
Irequently better. option is to have proceeds paid to a trust. For now
we are only considering the role oI liIe insurance in passing assets
Irom one party to another.
LiIe insurance proceeds are not taxable when received by a
beneIiciary unless the beneIiciary happens to be the estate oI the in-
sured! A person is considered an owner oI a liIe insurance policy iI he
enioys rights that go with ownership such as the ability to appoint or
change beneIiciaries. Sometimes the insured. owner and beneIiciary
are one and the same person or two or three separate people. A trap
Ior the unwary lies in the situation where the insured is one person
(A). the owner oI the policy is a second person (B). and the
beneIiciary is still a third party (C).
Let's suppose upon A's death that C receives a check Irom the in-
surance company. A's estate is not taxed because A had no owner-
ship rights (reIerred to as incidence oI ownership) and C's beneIits.
being proceeds oI an insurance policy. are not taxed (interest earn-
ings on the proceeds may be taxable. however. iI received as income
over time) butand herein lies the trapB will be considered to
have made a taxable giIt to C and will be taxed on the Iace amount oI
the policy which has become a generally substantial though inadver-
tent giIt. To avoid such a situation it is well to remember that when
294
the insured and the owner oI a liIe insurance policy are two diIIerent
people. the owner should also be the beneIiciary.
BUY-SELL AGREEMENTS
In a business. partnership. corporation or other entity with two or
more participants. iI advanced planning is not undertaken and one
party dies then that party's heirs succeed to his interest by intestacy
or will. This is generally not a desirable situation Irom the surviving
principal's point oI view nor is it likely to satisIy the heirs (generally
spouse and/or children).
Buy-sell agreements are an attempt by the parties to avoid a Iorc-
ed and usually costly dissolution oI a business venture due to the
death oI one oI the principals. Such agreements are established by the
principals during their liIetimes in order to provide cash to heirs Ior a
deceased participant's interest. The buy-out price is established by a
Iormula agreeable to all the principals and oIten with provision Ior
subsequent periodic adiustments. The buyers may be individuals or
the business entity itselI in which case the contract is reIerred to as a
redemption agreement.
LiIe insurance is usually taken out on each principal in an amount
suIIicient to cover the agreed upon buy-out price. The value oI a
deceased participant's business interest is includable in his estate iust
like any other asset. The advantage oI a buy-sell agreement. iI it is
drawn properly. is that it "Ireezes" the value oI the decedent's interest
Ior estate tax purposes. The Internal Revenue Code provides Ior the
executor oI an estate to pay the Iederal estate tax in installments
where a substantial part oI the estate consists oI closely held and
thereIore not readily marketable. business interests.
POWERS OF APPOINTMENT
A power oI appointment is the right given to a person (donee) to
decide who shall receive property. how and in what amount. OIten
the donor wants the decision as to who gets what property postpon-
ed until certain events occur or peculiarities oI possible appointees
295
can be ascertained. The decision. he Ieels. would be better made at a
later time in another light.
Powers oI appointment can be created either as a liIetime giIt
passed to a donee (also reIerred to as an attorney-in-Iact once he ac-
cepts the power) who no longer wants to make such decisions himselI
or the power can arise by will at a testator's (person who makes the
will) death.
II the power is a general power oI appointment. the donee can ap-
point to anyone including himselI as opposed to a special power oI
appointment which restricts the donee to exercising the power
among a select group speciIied by the donor. Sometimes the power is
exercisable only at the donee's death by means oI his will (testamen-
tary power) and other times it can be exercised during the donee's
liIetime (inter vivos power).
In some states a power oI attorney is revoked by the death or in-
competency oI the donor but in others (including New York and
CaliIornia) there is by statute what is called a durable power oI at-
torney which survives the incompetency oI the donor. In Iact. in
states where durable powers are recognized. sometimes they are
speciIically drawn so that they only spring into eIIect upon the
donor's incompetency. Not surprisingly these are called "springing"
powers. Helping to account Ior their popularity is the Iact that when
a donor is disabled there is no delay as would normally occur in a
court proceeding to appoint a conservator or other legal represen-
tative to handle the aIIairs oI an incompetent. However. even a
durable power oI attorney may sometimes be revoked by a successor
in interest to the incompetent donor and the applicable law must be
taken into consideration when planning.
The donee needn't accept the power; it can be renounced within a
speciIied time. usually nine months. aIter its discovery. You might
ask why someone would want to renounce a power oI appointment.
especially iI it were a general power and he could appoint property to
himselI or his heirs. Actually. whether he chooses to do so or not the
IRS looks at an unexercised general power precisely as iI the donee
had appointed the property to himselI and should he die not having
exercised the general power his estate is increased by the value oI
"what could have been." Naturally a special power oI appointment
296
does not carry the same tax consequences and thereIore provides
both a useIul and Ilexible tool Ior estate planning which is Irequently
used in coniunction with trusts.
TRUSTS
Trusts have been touted as the answer to every and all estate plan-
ning problems. That may be an exaggeration but it is hard to imagine
an estate where some type oI trust could not be used beneIicially.
When you (interchangeably reIerred to as the settlor. trustor or
grantor) give property in trust to some person or entity (called the
trustee) Ior the beneIit oI others (reIerred to as beneIiciaries) you are
simply trusting someone to handle your property Ior the good oI the
third party. The settlor (you) decides the rules under which the trust
will Iunction.
There are revocable trusts which means the settlor reserves the
right to change his mind and cancel the whole thing right up until the
time oI his death. and there are irrevocable trustsonce made they
are Iinalthey can't be undone (with special exceptions that don't
concern us Ior the purpose oI this discussion). Just as with the powers
oI appointment. there are both inter vivos (living) trusts and
testamentary trusts that take eIIect only at the settlor's death. Trusts
may be Iunded (property transIerred into them at the time they are
created) or unIunded with property to pass into them on the happen-
ing oI certain events.
It is generally possible to reduce the costs oI administration.
avoid publicity and soIten taxes by creating a trust during the
settlor's liIetime and then have him will all or most oI his assets to the
trustee to be held subiect to the provisions oI the trust. Death beneIits
and liIe insurance proceeds can be received by such a trust thereby
avoiding estate taxes. These trusts are commonly reIerred to as pour-
over trusts because assets are poured into them via the terms oI the
will.
Irrevocable trusts are oIten created to save taxes. You. as settlor.
will not be taxed on trust income as long as it is not used to discharge
any oI your own legal obligations or pay premiums on insurance on
your or your spouse's liIe. Distributed income is taxed to the
297
beneIiciaries who receive it. and who are hopeIully in a lower tax
bracket than the settlor. or to the trust as a separate taxpayer iI the
income is accumulated. When the Iunds are Iinally paid out to
beneIiciaries they receive credit Ior the taxes already paid by the trust
according to a specially computed Iormula. This is reIerred to as the
"throw back rule."
However. revocable trusts have no such tax advantages since the
settlor has the power over the assets at all times (aIter all. he can
revoke the trust anytime he desires and embrace the assets). Income
Irom a revocable trust is taxed to the settlor during his liIe and the
principal is taxed to the settlor's estate when he dies.
But there are. oI course. a myriad oI reasons to create a trust. A
settlor may seek relieI Irom managing his estate during his own
liIetime and be willing to pay Ior the proIessional services oI a
trustee. He may even Ieel his heirs are incapable oI managing the
estate assets aIter he is gone and he thereIore lays out instructions in a
trust Ior their protection and beneIit.-The Iact that trusts by-pass
probate may be a very desirable Ieature. more so to some people
than to others. Trusts provide a means oI passing property to minors
so that a trustee can manage the assets until they are capable oI doing
so themselves. This bypasses the rigidities connected with legal guar-
dianship.
Revocable trusts may also be used to anticipate the need Ior
managment oI assets in the event oI incompetency. The trustee can
oIten act when the power oI attorney is no longer eIIective.
ThereIore. a combination oI a durable power oI attorney and an un-
Iunded revocable living trust may be a desirable plan against in-
competency. Upon realization oI the donor's disability the attorney-
in-Iact could simply transIer the donor's assets to the ready and
waiting trust thereby Iunding and activating it. A convertible trust is
oIten used Ior this same purpose. The settlor oI the trust acts as
trustee or co-trustee until such time. iI ever. that he is disabled
whereupon the trust converts to an irrevocable trust Ior the settlor's
beneIit and the co-trustee takes over the management.
Trusts allow you to avoid having court administration oI your
estate (probate) which may be costly. time consuming and embar-
rassing (public record). You can protect your beneIiciaries Irom their
298
own inexperience by providing proIessional management with the
proper trustee or by laying out instructions yourselI Ior their protec-
tion and beneIit. II the trust is activated during your liIetime. you can
preview the management oI your aIter-death estate and see iI the
trustee is really as capable as you had hoped. This is tantamount to
getting a second chance to resolve observable weaknesses and over-
sights and perhaps substitute trustees. Also. aside Irom estate plan-
ning per se. trusts can be excellent income stretchers as we observed
brieIly in chapter twenty. You can provide Iunds Ior the children's
education or support oI dependent parents by setting up trusts that
will be taxed in brackets lower than yours. In reality. this is a means
oI expanding your aIter-tax dollars.
Each state has its own laws governing such things as trustee
powers and the length oI time property can be held in trust. You can
choose the state law you want to govern your particular trust as long
as some material connection with the state oI your choice can be
observed. It may be that some oI the trust real estate is located in that
state or that it is the principal place oI residence oI the settlor or the
trustee.
Your attorney is your best source oI inIormation regarding
trusts. However. to reiterate the theme oI this book. it will be to your
advantage to Iirst arm yourselI with knowledge so you can in-
telligently ask questions and make suggestions during a consultation
with any proIessional.
WILLS
A will is a legally enIorceable document eIIective upon the maker's
(testator's) death. It declares what a person wants done with his
property and oIten provides instructions regarding other matters.
Wills Iall into three categories: noncupative or oral wills. the
holographic or entirely handwritten will and the Iormal witnessed
will which is the only type we are concerned with Ior our purposes.
Everyone should take the trouble to have a Iormal will draIted. Non-
cupative and holographic wills are deIinitely not recommended or
even recognized in some states and are useIul only in unplanned
emergency situations. OI course. the purpose in writing this book is
299
to see that you never get caught in such an unplanned situation. A
codicil is an amendment to an existing will and requires the same Ior-
malities as the original will.
Laws concerning the Iormalities oI draIting wills diIIer Irom one
state to another so it is wise to get local counsel. Because entire books
have been written in a popular. easy-to-understand oI this subiect
(see recommended reading list). I will only attempt to make what
may seem like disiointed observations coupled with comments
where I Ieel strongly about a particular point.
(1) Women should make wills as well as men. (2) You should stay
away Irom ioint wills. that is sharing a will with your spouse. (3)
Make certain you name a guardian and alternate Ior minor children
iust in case both parents die. Choose wisely and make certain you
secure the proposed guardians' consent beIore appointing them in
your will. (4) When choosing witnesses look Ior someone younger
than you who will be easy to locate at a later date. (5) Do not let a
person who is a beneIiciary oI the will also be a witness; while legal it
is ill-advised. (6) Only very simple changes should be made by
codicil. Rather than use a series oI codicils to continually update the
will or to institute maior changes. the entire will should be rewritten.
(7) Get in the habit oI reviewing your will every Iew years to make
certain you Ieel the same way in light oI changing circumstances in
your liIe. (8) II several diIIerent wills are oIIered Ior probate only the
last will in time will be accepted. (9) Make use oI the opportunity to
enumerate the terms and conditions oI a testamentary trust when
writing your will with your attorney's assistance. (10) Decide and
make it clear in the text oI the will. whether each beneIiciary should
pay his own percentage oI death taxes or whether all death taxes
should be paid out oI the residuary estate (what's leIt aIter speciIic
giIts have been made). (11) Always name an alternate or coexecutor
in case the Iirst is unwilling or unable to serve. (12) Your executor
should seek the assistance oI an attorney in most instances but it is to
be the attorney oI his choice. not yours. (13) Personalize your will
with warmth. witticisms. nostalgia. etc.. taking into consideration
the Ieelings oI loved ones when they hear it read at what is likely to
be a psychologically painIul time Ior them. Do not vent present
300
anger or include anything you might possibly regret. as usually a lot
oI time passes between the draIting oI a will and a death.
A will is a custom made document. Use it instead oI letting the
law determine how and to whom your assets should be distributed.
The very wealthy have enough assets to take care oI their loved ones
no matter how poor the planning. The less property you have the
more care must be taken in distributing it properly. Intestacy. as we
will see next. attempts to do what the courts Iigure you would have
wanted done iI you had a say. You have that saynowdon't
throw it away!
INTESTACY
It is generally believed that less than 20 oI Americans have wills.
Since the circumstances oI your Iamily are unique it will always be
less than satisIactory to apply a standard Iormula when dealing with
them but that is what the law must try and do when you die intestate.
The cost oI draIting a will is oIten less than the trouble and ex-
pense oI posting the bonds required by law when you die intestate.
Bonds are necessary to ensure that the court appointed ad-
ministrator does his iob properly and to guarantee adequate perIor-
mance by the guardians who must be appointed Ior each minor child
in the absence oI a will. Through your will you can also waive these
bond requirements although it may not always be wise to do so.
Just how your estate will be divided varies Irom state to state. but
a typical intestate distribution might work somewhat like this: One
halI oI everything to your spouse. one halI to children. or iI more
than two children then perhaps one third to spouse and two thirds to
children or iI no children. divided between spouse and parents. II
you should have neither spouse. descendents nor parents living. then
brothers and sisters would be next in line to inherit in most iurisdic-
tions. Iollowed by aunts. uncles. cousins and more distant relatives.
In the rare case where no relations can be located the estate would
become the property oI the state. Check your state's probate code in
your local law library.
301
REASONS TO AVOID
INTESTATE DISTRIBUTION
We discussed earlier. at page 280. the restrictions the law imposes on
a court-appointed administrator in managing your estate which
oIten results in an unnecessary shrinkage oI assets. Not being able to
choose an executor whose management abilities you trust and who
could Iollow your instructions is one oI the main disadvantages oI
dying intestate but even worse is not being able to control how and
to whom your estate is distributed. You are prevented Irom using
trusts Ior tax savings. management and to prevent certain heirs Irom
receiving their inheritance outright with no thought as to their in-
dividual capacities to handle it.
SUMMARY
In chapter twenty-two we arbitrarily identiIied seven obiectives oI
estate planning: (1) to choose your heirs. (2) cut administration costs.
(3) provide liquidity Ior the estate. (4) provide Iinancially Ior
dependents via liIe insurance. (5) ways to keep a business Iunctioning
or to reduce losses. (6) reduce' taxes. and (7) provide a means oI
transIerring assets.
With proper planning we determined that: (1) assets can be
transIerred by the manner in which you take title to property. (2) by
appointing beneIiciaries to receive your employment death beneIits
or liIe insurance proceeds. (3) by establishing trusts during your
liIetime. (4) by granting powers oI appointment. (5) making buy-sell
agreements. (6) providing a liIetime giving program. (7) by making a
will. (8) creating testamentary trust and (9) by the various state laws
governing intestacy.
We observed that trusts were useIul Ior (1) tax savings. (2) pro-
viding Ior minors in a less rigid Iorm than guardianship. (3) aIIording
protection Irom selI and others. (4) protecting business interests. (5)
granting the trustee discretion and the Ilexibility needed Ior proper
302
management and (6) allowing the assets to be managed proIessional-
ly and without interruption.
We looked at the three kinds oI estate: probate estate. gross
estate. adiusted gross or net estate which is all that will really reach
your heirs!
The worksheet should help you realize which methods you are
using now and determine iI some you have not yet tried could be put
to good use in your particular situation.
303
WORKSHEETCHAPTER TWENTY-THREE
WHICH METHODS OF ESTATE TRANSFER
ARE YOU NOW USING
OR SHOULD YOU CONSIDER?
1. How do you hold title to the following:
residence?
vacation home?
automobiles?
boats?
furs and jewelry?
collections?
furniture and household?
other personal property?
life insurance policies?
brokerage accounts?
business interests?
pension accounts?
profit-sharing accounts?
other retirement
accounts?
cash and checking accounts?
savings accounts?
savings certificates?
money market funds?
common stocks?
mutual funds?
corporate bonds?
municipal bonds?
U.S. government securities?
U.S. savings bonds?
preferred stocks?
investment real estate?
thrift plan accounts?
credit union accounts?
other property?
2. Who is the beneficiary of your:
life insurance?
pension ben^"3?
all other deati benefits?
3. What kinds of trusts do you have or should you consider?
living trust
testamentary trust
life insurance trust
pour-over trust
support trust
others
Clifford trust
charitable trust
discretionary trust
accumulation trust
spendthrift trust
304
4. Have you granted or considered granting any powers-of-
appointment? To whom?
5. Would a buy-sell agreement make sense in your situation?
Do you have one yet?
6. Have you established an ongoing lifetime gift program?
Are you in a position to consider doing so?
7. Have you made a will? f not, why not? List five good
reasons why you should put off making your will. List ten
good reasons why you should make arrangements for draf-
ting your will this week!
8. Check the laws governing intestacy in your state. Banks,
law offices and your state bar usually have helpful pamphlets
in this regard and will be glad to provide you with this infor-
mation free of charge. Or check the probate code in your
local law library.
Write down in your notebook exactly how your state will
distribute your assets if you die intestate. Are you completely
happy with the state's arrangements or is there some way
you could improve on it?
305
RECOMMENDED READING
CHAPTERS TWENTY-TWO & TWENTY-THREE
Write Your Own Will. by Robert Schwartz
Your Will and What to Do About it. by Samuel Kling
You and Your Will. by Paul Ashley
Your Estate & Gift Taxes. by J.K. Lasser
CCH Estate Planning Guide. by Kess and Westlin
Dow-Jones Irwin Guide to Estate Planning. by William Clay. Jr.
The Complete Estate Planning Guide. by Robert Brosterman
Estate Planning After the Reagan Tax Cut. by Peter Lippett
Your Complete Guide to Estate Planning. by Parnell Callahan
How to Avoid Probate. by Norman Dacey
Personal Estate Planning. by Marcos Kinevan
The Essentials of Estate Planning. by Victor Whitney
A Familv Guide to Estate Planning. Funeral Arrangements and Set-
tling an Estate After Death. by Theodore Hughes and David
Klein
306
ADDITIONAL RECOMMENDED READING
All books written by:
* Sylvia Porter
* Jane Bryant Quinn
* Venita Van Caspel
Handbook of Investment Products & Services. by Victor Harper
Monev Talks. by Bob RoseIsky
// Thevre So Smart. How Come Youre Not Rich? by John Springer
Financial Freedom. A Positive Strategv for Putting Your Monev to
Work. by Jim Barry
Economics in One Lesson. by Henry Hazlitt
The Philosophv of a Peasant. by Rodney Peterson
The Kev Lecture Series. A New Tax Structure for the United States
The World Capital Shortage
by Bobbs-Merrill Educational Publishing
4300 West 62nd Street
Indianapolis. Indiana 46206
Nolo Press and Nolo News
(SelI-Help Law Books)
950 Parker Street
Berkeley. CA 94710
307
Inde
x
Alabama. 50
Alaska. 50
Accelerated Cost Recovery (ACR). 244
Acts. congressional:
Federal Unemployment Insurance Act.
49
H.R. 63 (proposal). 114
Employee Retirement Income Security
Act oI 1974 (ERISA). 182. 199. 202
Economic Recovery Tax Act oI 1981
(ERTA). 185. 240. 291
Keogh Act oI 1962. 189
Social Security Act. 227
UniIied GiIts to Minors Act. 240
Actuarial tables. 224
Accident. 61
Adams. Ansel. 211
Adiusted gross income. 224. 226. 247
Administrator. court appointed. 278. 280.
281. 302
Alimony. 226
Alternative minimum tax. 189. 247. 248
Annual report. 107. 108
Annuities:
beneIiciary oI. 293
distribution. 203
ioint & halI survivor. 199. 200
pros & cons. 204
single liIe. 200
taxation oI. 223. 224
Antiques. 159
Any occupation. 60. 62
Appreciation:
basis Ior giIts. 291
physical assets. 156-158
real estate. capital growth. 144. 148
Aristotle. 55
Art. 157. 158. 237
"At Risk" rule. 161. 245
Automobile insurance. 36. 60. 85
Basis (tax):
donor. donee. 291
real estate. 236. 245
unitrusts. 241
Balanced Budget. 266. 267
Baruch. Bernard. 102. 215
Beale. Howard. 267
BeneIiciaries:
avoid probate. 278
designating pitIalls. 76
duty to. 281
liIe insurance proceeds. 294. 295
oI trusts. 293. 298
BeneIits:
insurance. 61-63
pension. 199-207
"Blue Chip." 110
Bonds. 101. 121-129. 237
bearer. 123
call provision. 122
convertible. 124
corporate. 124
debenture. 124
government. 246
mortgage. 124
municipal. 125. 194. 242
ratings. 122
registered. 123
revenue. 125
treasury. 126
yield. 122
Book value. 108. 132
Bradley-Gephardt plan. 263
Brokerage houses. 112. 124
Business. 295
interests. 283. 284
"Buy-down mortgage." 144
Buy-sell agreement. 284. 289. 295
309
CaliIornia:
community property state. 290
disability beneIits. 144
durable power oI attorney. 296
Populist movement. 243
Proposition 13. 229-231
real estate. 60
State Bar. 277-278
Unemployment insurance. 49-50
callability. 101. 122. 123
capital accumulation. 94. 135. 145
capital gains. 257. 260. 294
giIts. 291
in expenditure tax plans. 263. 264
in Ilat rate tax plans. 263
pre-ERISA tax. 202
rule explained. 235-236
stocks. 114
tax-managed Iunds. 134
unitrusts. 241
Carnegie. Andrew. 96
Carter. President Jimmy. 259
CertiIied Financial Planner (CFP). 35
Charitable contributions. 226. 263
Charitable lead trust. 242
Charitable remainder trust. 241
Chartered LiIe Underwriter (CLU). 35
Chartered Property Casualty Underwriter.
35
children:
giIts to. 240
guardians Ior. 300
inheritance by intestacy. 301
trusts Ior. 298. 299
Churchill. Winston. 184
Cleveland. President Grover. 243
CliIIord trusts. 241
closed-end mutual Iunds. 133. 135
codicil. 298. 300
coins. 156
co-insurance. 42
collateral. 75. 100
college. 54. 75
Common Business Oriented Language
(COBOL). 214
Common. tenancy in. 289
community property. 290
compounding interest:
whole liIe insurance. 70
dividend reinvestment. 111-112
bonds. 121-122
compared with simple interest. 193
Keogh plans. 189
illustration (Sue & Mary). 170-171
retirement. 175
ESOPS. 186
IRA. 191
Comprehensive Personal Liability
Insurance (CPL). 85. 86
Congressional Acts (See Acts.
congressional)
Constitution. U.S.. 253. 256. 261. 264. 267
Convertible bonds. 124
Co-ordination-oI-beneIits provisions. 61
Corporations:
as part oI estate. 283
beneIits oI incorporation. 248
closely held. 283. 284. 295
investing in art. 157
tax aspects. 257-259
utility bonds. 124
Creditors. 98. 278. 289
Credits (Tax). 224. 247. 279. 292
Crown-loan. 242
Damages. 36. 222
Death beneIits:
estate transIers. 289. 293
Iree oI taxation. 202. 222
pension plans. 293
trusts. 297
Deductions (tax)
estate taxes. 279
Ilat-rate proposals. 263
income tax aspects. 224-226. 244-247
IRS rules. 254
"DECS" (deductions. exclusions & credits).
224
Deductible
employer contributions. 185
encourages consumption. 172
ESOPS. 186
in comprehensive medical insurance
policies. 44
in maior medical insurance policies. 42
insurance term. 86
interest payments. 257
IRS regulations. 254
real estate losses. 148
DeIense Language Institute (DLI). 25
Depreciation. 244
Depression. 143
Diamonds. 157. 237
Disability Insurance. 59-67
disability deIined. 59. 60
partial disability. 61
pension plans. in 183
DiversiIication. 96. 135. 174
Dividends
corporations. 257
in estates. 284
participating liIe insurance company. 73
tax aspects. 223. 242
Dollar-cost averaging. 111
Double indemnity. 61
310
Dual-purpose Iunds. 135
Earnings per share. 108
Economic Recovery Tax Act oI 1981
(ERTA):
ACRS, 244
all savers certiIicates. 243
estate planning. 291-293
ESOP. 186
giIts. 240
IRA. 191
Keoghs. 245
stock purchase plans. 185
Edison. Thomas. 215
Education:
giIts to institutions possible. 291
possibilities. 53. 54
tax considerations. 225
EIIective annual yield. 193
Egger. Roscoe. 246
Ehrbar. A.F.. 259
Elimination period. 60. 61. 239
Employee Retirement Income Security Act
oI 1974:
annuities. 199
eIIect on companies. 184
Keogh Act. 189
lump sum. 202
pension plans. 182. 195
vesting provisions. 183
Employee savings plans. 111
Equity sharing. 145
Ervin Jr.. Senator Sam. 214
Employee stock ownership plans (ESOPS).
186
Exchanges. 238
Exclusion ratio. 204
Exclusions. 223. 224. 227. 240
Executor. estate:
beneIits oI. 302
his choice oI attorney. 300
how to choose. 281-282
waive bond. 280
your choice. 278
Exemptions:
and Alternative Minimum Tax. 247
and uniIied credit. 292
Iorm oI deduction. 226
expenditure tax. 263. 264
Expense ratio. 132. 133
Expenses. deductible. 225
Face value. 122. 123
Family. 52
Family income liIe insurance. 72
Family oI Iriends. 136
Federal Insurance Contribution Act
(FICA). 227
Federal Reserve. 124. 127. 173
Fiduciary. 281
Financial Planner. 19. 20. 35. 141
Fire insurance policies. 84
Flat-rate tax. 262. 263
Forbes Magazine. 213. 244. 255
Fortune Magazine. 259
Franklin. Beniamin. 215
Free enterprise. 255. 266
Friedman. Milton. 255. 261. 266
GiIts:
aIIected by ERTA. 240. 291-292
in contemplation oI death. 291
liIe insurance as inadvertant giIt. 294
method oI estate transIer. 289
oI Iuture interests. 293
powers oI appointment. 296
real estate. 145
tax aspects Ior donee. 222
to minors. 240
Goals:
compared to obiectives oI mutual Iund.
136
individual. 20. 23-26
national. 264
Gold:
as collateral. 100
equity investment. 237
mutual Iund. 135
utilitarian investments. 159
Goodman. Ellen. 266
Government beneIits. 61
Government insurance. 62. 71
Government securities. 126
grace period. 74. 85
grants. 223
Gross estate. 279
adiusted. 284
Group insurance:
beneIits. 62
disability coverage. 60
explained. 45
liIe insurance policies. 71. 72
Guaranteed insurability. 61
Guardians. Ior minors. 300
Hayes. Helen. 212. 247
Health Insurance:
basic coverage. 42
comprehensive coverage. 44
excess maior medical. 44
inside limits. 41
maior coverage. 42
Heirs. 282. 284. 295
Hildebrand. Joel. 210
Hobbes. Thomas. 215
Hobbies. 51. 156. 157. 159
Home oIIice deduction. 246
Homeowners policies. 60. 84. 223
311
Hoover. President Herbert. 255
Hopper. Grace Murray. 213
Hospital. 60
H-R 10 Plan. 189
Hypotheticals:
Jon. 24
Mr. Paine. 43. 62. 63
Mary & Sue. 170-171
Income. 221
gross. 222-224
Indexing. 260-262
InIlation:
as hidden tax. 266
as related to indexing. 262
explained. 172-173
makes dollars less valuable in Iuture.
235
metals as inIlation hedges. 159
perhaps in Iorty years. 191
prior to 1983. 203
utilitarian investments. 155
versus unemployment. 267
Insurance:
disability. 59-69
health. 41-49
liability. 83-93
liIe. (See liIe insurance)
unemployment. 49-59
use in estate planning. 282
Insurance agents. 34. 35. 76
Insurance policy. 34. 158
Interest:
deductions encourage corporation
borrowing. 257
in choosing an IRA. 193
interest on annuities taxed. 223
no deduction allowed Ior mortgage
interest. 263
on liIe insurance proceeds. 294
Internal Revenue Code:
general. 221. 246. 295
Sec. 303. stock redemption. 284
Sec. 1031. exchanging "like kinds" oI
property. 238
Sec. 2035 (a). giIts. in contemplation oI
death. 291
Sec. 2503 C. giIts to minors. 240
Internal Revenue Service:
"at risk rule." 161
below market interest considered taxable
giIt. 145
business deductions Irom income tax.
225
concerning income tax. 224. 227
deductions permitted. 254
errors and tax returns. 248
exchanges oI "like kinds" oI property.
238
taxation oI giIts. 223
unexercised general power taxable. 296
Intestate:
buy-sell agreement better than. 295
deIined. 280
prevalence oI intestacy. 301-302
title to property aIIects. 289
Investments:
general. 104. 155-164. 223
antique Iurniture. 159
coins. 156
diamonds. 157
equity investments. 237
movies & theatricals. 160
paintings. 157
passive. 149
precious metals. 159
real estate. 244
rugs. 158
stamps. 156
Investment Clubs. 112. 119
IRA:
and other retirement plans. 238
appropriateness oI municipal bonds. 246
as simpliIied pension plan. 188
deductible contributions. 226. 245
explained. 191-194
Ieatures oI expenditure tax. 264
"roll overs." 203
tax advantages. 293
Issue limits. 62
Jaroslavsky. Rich. 259
JeIIerson. Thomas. 243. 244
Joint tenancy. 278. 279. 290
Kant. Emanuel. 215
Kelso. Louis. 187
Kennedy. President John Fitzgerald. 266
Keogh. 189. 238. 245. 293
Kroll. Appy. 213
Letter stock Iunds. 135
Leverage. 144. 160
Liability insurance. 83-89
LiIe insurance:
buy-sell agreements. in. 295
endowment. 71
estate planning. in. 282. 283. 291
Iamily income. 72
general. 60. 69-82
grace period. 74
IRC #2035 (a). 291
owner oI. 294
participating. 73
proceeds options. 77. 78. 222. 279. 284.
289. 294. 297
312
Servicemen's Group LiIe Ins. (SGLI). 72
term. 70. 73
trust. 284. 294
whole liIe. 70. 73. 74
Liquidity:
estate planning. in. 69. 283-284
deIined. 97
institutional real estate investors
increased liquidity. 142
provided by liIe insurance. 294
REITS are liquid. 149
Lump-sum. 202. 238. 293
MacArthur. Douglas. 215
Marital deductions. 279. 292. 293
Medical expenses. 247
medical surcharge. 41
Medicare. 44
Michener. James. 212
Military. 53. 222. 223
Mnemonics. 26. 93
Money-market Iunds. 132. 134
IRAs. 193
Monev Magazine. 133
Movies. 160
Municipal bonds. 125. 194. 242. 246
Murphy's Law. 33
Murray. Arthur. 212
Mutual Funds:
balanced Iunds. 134
bond Iunds. 134
dual-purpose Iunds. 135
Iamily oI Iunds. 136
general. 131-140
hedge Iunds. 135
history. 131
IRAs. 193
letter-stock Iunds. 135
municipal bond Iunds. 134
open & closed end. 133. 134
specialized Iunds. 135
stock Iunds. 134
tax-managed Iunds. 134
venture capital Iunds. 136
New asset value (NAV). 133. 283
Net estate. 279. 280
"Network." 267
Net worth. 36-40
New Jersey. 50
Newman. Justice Frank. 231
Newton. Sir Isaac. 215
New York. 60. 296
Nixon. President Richard. 267
"Non-can" policy. 45
"No-load." 132. 133. 194
Open-end mutual Iunds. 133. 134
"out-oI-pocket." 246
"own occupation." 59
Parkinson. Northcote. C. 261
Participation limits. 62
partnership. 295
limited. 149. 150. 160
Pensions. 60. 61. 132. 264
Pension Plans:
contributory. 182. 185
deIined-beneIit. 183
ESOPS. 186
general. 182-196. 257
money-purchase. 183
proceeds. 293
proIit sharing. 184
salary reduction. 188
savings plans. 187. 194
simpliIied employees pensions (SEPs).
188
stock purchase. 185
supplemental executive retirement plans
(SERP). 186
target plans. 183
tax sheltered annuities (TSAs). 187
Personal Auto Policy (PAP). 86
Phantom income. 245
Planning. 19. 24
Populist movement. 243
powers-oI-appointment:
durable. 296
in general. 112. 289. 295. 296
special power. 296
springing power. 296
premiums. 73
automatic. 74
Presidential Commission. 41
price earnings ratio (P/E). 108
prison clauses (ins.). 61
probate. 278. 294. 298
probate estate. 279
ProIessionals:
accountants & tax attorneys. 292-293
attorneys. estate planning. 278. 290. 299
beneIits to small estates. 20
brokers & investment counselors. 112
insurance agent. calculating. 76
insurance agents. choosing. 35
investment managers. 138
real estate brokers. 149
reputable dealers in physical assets. 155.
156
Progressive tax system. 226. 254. 257
Property ownership. 289. 290
Proposition 13. 229-231
Reagan. President Ronald. 258. 259. 260.
262
313
Real Estate:
appreciation. 143
cash Ilow. 143
commercial. 148
cyclical. 142
development. 148
exchanges. 238
general. in. 141-153. 244
illiquidity. 141
income property. 147
leverage. 144
liquidity. 149
obsolescence. 142
REIT. 149
syndications. 149
taxes. 229. 239
tax beneIits. 143. 236
title. 289
vacancy. 142
Red Cross. 54
Renewal provisions. 45
Resources. 51
Retirement. 169-215
Retirement Plans. 182-196
Richmond. George. 230
Riders (insurance). 72
Risk:
letter stock & hedge Iunds. 135
movies & theatrical investments. 160
need Ior liability insurance. 83. 84
the role oI insurance. 33-37
utilitarian investments. 155
venture capital Iunds. 136
RockIarb. Ruth. 214
"roll-over." 203
Roosevelt. President Franklin Delano. 265.
266
Root. Elihu. 215
Ross. Clarence. 214
"Rule-oI-45." 182
SaIety-net. 49. 243
Salary reduction plans. 188
Santayana. George. 115
Savings bonds (government). 125. 126.
237. 238. 260
Schulze. Rep. Richard. 114
security. 93
Securities & Exchange Commission (SEC).
135. 136. 137
Seneca. 25
Senior Achievers Enterprise. 171
Servicemen's Group LiIe Insurance (SGLI).
72
Shakespeare. William. 19. 26
Shelters. tax:
deIined. 99
good and bad aspects. 246
pension plans. aspect oI. 182
questionable legality. 103
real estate investments. 143. 145. 148
Simon. William. 259. 264
SimpliIied Employees Pensions (SEPs). 188
Smith. Adam. 265
Socialism. 255
Social Security:
elimination period Ior. 60
excluded Irom income taxation. 223
government liIe insurance. as. 71
government transIers. 257
history oI. 227-228
in Bradley-Gephardt Plan. 263
retirement. 169
qualiIying. not enough. 256
Speculative. 135. 160
splitting (tax purposes). 291. 292
stamps. 156
Stanberry. James. 243
step-up (basis). 291
Stock:
basis. 291
conservative. 110
contrasted with bonds. 121
cyclical. 110
growth. 109
in estate. 284
in general. 107-119
mutual Iunds. 131. 132. 134
preIerred. 101
speculative. 109
split. 109
stop-loss provision (insurance). 43
story. 25
Supplemental Executive Retirement Plans
(SERPs). 186
Supplementary Medical Insurance (SMI).
44
Survivorship rights. 278. 279. 290
Tax deductible. 43
Tax Equity & Fiscal Responsibility Act oI
1982 (TEFRA). 248
Taxes:
basis. 236. 241
consumption. 263
corporate. 258
deduction. 185
deIerment. 182. 191
expenditure. 263. 264
Ilat-rate. 262.263
history oI. 253. 254
income tax. 221-227
progressive. 254
role in Iinancial planning. 99
Tax shelters (See Shelters. tax)
Tax Sheltered Annuities (TSA). 187. 293
314
Ten-year-averaging:
in beneIiciary arrangements. 293. 294
in lump-sum distributions. 202. 238
in salary reduction plans. 189
Ten year trusts (see CliIIord Trusts)
Thoreau. Henry. 170
"throw-back rule." 298
Time Magazine. 212
Titian. 215
Title to property:
community property. 290
Iee simple. 289
ioint tenancy. 278. 279. 290
tenants in common. 279. 289
TransIer payments. 256
estate. 293. 298
within 3 years oI death. 291
Treasury. U.S. government:
Bills. 126
Bonds. 126
Notes. 126. 127
Truesdell. Edith. 211
Truman. President Harry. 259
Trusts:
charitable lead. 242
charitable remainder. 241
CliIIord. 241
Iunded. 297
in general. 136. 198. 248. 297-299
irrevocable. 297
liIe insurance. 284. 294
living (inter vivos). 278. 284. 289
pour-over. 297
REITs. 149
revocable. 297. 298
testamentary (eIIective on death oI
maker). 284
trustee. 297
trustor. 278
unIunded. 297
unit investment. 124
24 hour coverage (insurance). 61
Umbrella contracts. 86
Underwriters. 123. 124
Unemployment. 267
Unemployment Act. 49
Unemployment compensation. 223. 256
Unemployment insurance. 49-58
UniIied credit. 292. 293
UniIied GiIts to Minors Act. 240
U.S. Government Securities. 126. 127. 134
Unit investment trust. 124
Value Line. 133
Venture capital Iunds. 136
Verdi. 215
vesting. 182. 189. 202
Volcker. Paul. 173
Waiver oI premium. 61
Wall Street Journal. 259
Wilde. Oscar. 171
Wills:
discussed. 299-302
Iorm. CaliI. Bar sponsored. 277-278
Iorm oI property ownership not aIIected
by. 289. 290
role oI trusts. 297
Winwood. Estelle. 211
Workers compensation. 44. 60. 62. 222
Wren. Sir Christopher. 215
Yield. 94. 108. 122. 193
YMCA. 54
Zero bracket (tax). 226
315